by classvipartners
For smaller businesses (valued at less than $5-10 million), individuals can be possible buyers. These might be ex-executive who are seeking a career change, an entrepreneur who has already sold a business and might be interested in their next venture, or any other individual who is interested in owning their own business.
One variation on individual business buyers is individuals who are classified as “high net worth”, meaning a net worth of over $10 million. These individuals have additional financing capacity to purchase businesses (which means they can purchase larger businesses) and may be purchasing multiple companies as a part of their overall investment strategy.
Pioneered by Stanford business professor Irv Groesbeck, search funds are usually run by one or possibly two recent business school graduates. The fund managers raise initial financing from investors (usual individuals) of around $200-300 thousand. The managers use these proceeds to conduct a search for a business to purchase. Once they have identified a business to purchase, they will then go back to the same pool of investors to raise the equity capital required for the purchase of the business.
Private equity firms are active buyers of businesses valued at over $10 million. Private equity funds come in all sort of different flavors – some focus on smaller acquisitions, while some focus on larger acquisitions. Some are industry-focused while others are generalist firms and will buy companies in almost any industry. A private equity fund might have $100 million in equity capital to invest, while others might have over $10 billion. Some funds only buy businesses within a specific geography, while others have a global focus. In addition, they can have different approaches to the companies they purchase – some might be focused on healthy, growing companies, while others focus on turning around troubled businesses. There are thousands of private equity firms in the U.S.
Different from a funded private equity firm that has a dedicated fund they have raised from their limited partners (pension funds, insurance companies, endowments, and high net worth individuals), a fundless sponsor private equity firm does not have a dedicated fund from which to provide the required equity capital in their purchases. As a result, for each transaction they wish to complete, they must go out to investors to raise equity capital. They tend to be slower and riskier as a buyer because they cannot commit the equity capital themselves out of their fund.
Ultra-high net worth families (assets over $100 million) sometimes create a family office that will manage their money (investing in both public and private securities). These family offices look like funded private equity firms in a lot of respects but can have longer exit time horizons because they themselves are the investor (private equity firms have to return capital to their limited partner investors, so their time horizons for holding an investment typically range from 3-7 years).
A strategic buyer is another company, typically in the same or a related industry to the seller’s company. Strategic buyers can be large Fortune 500 companies or they can be smaller private companies. Larger companies with well capitalized balance sheets tend to be more reliable buyers because they have committed financing in place (cash on their balance sheet or perhaps an acquisition line of credit that is already in place).
Similar to a strategic buyer, there are many private companies that have already been acquired by a private equity firm. These companies are called “platform acquisitions” because the private equity firm’s investment strategy is to use the platform company to acquire other companies to execute a “roll-up” or “consolidation” strategy.
Also a type of strategic buyer (but with very specific nuances a seller must pay attention to), a competitor is a firm that competes directly or indirectly with the seller. These buyers can be great buyers because they can often pay more than fair market value for a company, but they are very tricky to manage given the potential risks associated with a busted deal (disclosure of the seller’s strategy or confidential information, etc.).
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