Over the past few years, we have seen an explosion of business investors looking to buy up small to mid-size companies. Investors seem to have ventured out of the world of Mergers and Acquisitions and into the market of small business sales. Since most people selling their small to mid-sized companies aren’t too familiar with investors, we wanted to identify and explain the 3 most common investor types that we are seeing inquire on our listings, make offers to purchase, and eventually close on the deal. It’s important for sellers to understand who these investors are and what their typical mode of operation is, so we will break it down for you here.
The first type of investor we want to mention is a family office. They are a privately owned company that is set up like a corporation or LLC, who manages the money and investments for a very wealthy family. Typically, they have funds at their disposal at 9 figures plus. A family office is characteristically seasoned and has experience investing in different businesses across multiple industries. Essentially, they are sitting on a very large amount of funds that needs to be invested in order to maintain and create more wealth for generations to come, and they are looking for good opportunities. Family offices might invest in private equity, venture capital opportunities, hedge funds, commercial real estate, and existing business opportunities.
We’ve seen an increase in inquiries on business sale listings from family offices over the years, as they reach to diversify. Because they have large sums of cash to invest, they are more than likely going to be making a cash purchase, rather than utilizing a loan. The way a family office handles the businesses after the purchase is more of a “buy and hold” strategy, where they seek to keep the business in their portfolio for a longer period of time. They will normally hire a manager to run the business on their behalf.
Private Equity Groups
Private equity groups invest capital into business ventures with the goal to flip, develop, restructure, improve, build up, and then eventually sell. Just like with family offices, we have seen a sharp increase in private equity groups inquiring about the businesses we have for sale. They normally have investors and funds in place; however, they are more likely to use leverage like a loan or seller finance to complete the purchase.
Most private equity groups have their own set of guidelines as to what they are looking for in an acquisition and their acquisition process will vary from group to group. So unfortunately, there isn’t a lot of continuity when working with private equity groups on the sale of businesses. They each have a unique way of working their acquisition process, which doesn’t always jive with the way that we handle business sales on the open market. So, sellers, don’t be surprised if your business broker presents an offer to you on your business that is unconventional or strays from the “normal” process of a business sale. As business brokers we are obligated to present any and all offers, even if they are outside the traditional box that we work in. Now of course, you as the seller have every right to counter anything in that offer that you are not happy with or want to change. So, in other words, you should only move forward with a deal that feels right for you.
While a family office and an established private equity group are legitimate investors, we have seen a tidal wave of what we call “dreamers” or new investors come onto the scene over the past few years. They are normally younger individuals, who have seen a YouTube video on “how to invest in businesses with zero money down” or they have taken a seminar in investing. They gather a few more like-minded individuals to create an “equity firm” with a fancy name and get a flashy website with skyscrapers on the homepage. They then inquire on businesses for sale and try to go through the purchase process with almost no capital to spend. Typically, after they identify an opportunity they like, they go out to their “investors” and try to raise enough money to purchase the business. They are extremely inexperienced and don’t understand the sales process, which can make a sale much more challenging.
This type of investor we are very careful to try and identify before they receive any confidential information on a business we have for sale. This is why we will work to find out what type of investor someone is, how much capital they have to invest, what their acquisition process is, and what their plan is to manage the business. Those are all questions that any investor will be asked in the very beginning stages by one of our business brokers. If they don’t have solid answers to those questions, then we won’t be moving them forward in the process. While we understand that everyone has to start somewhere, new investors can be quite a risky chance for a seller to take. Most deals that we’ve attempted to transact with a new investor have either fallen apart during the process (most of the time because they can’t get the money from their “investors” to close the deal) or the deals have been a bit messy because they don’t understand how the purchase process works. For sellers, this is obviously not the ideal situation.