Does Selling to a Strategic Buyer Make Sense for your Company?

hey everyone i'm susan sorava with comerica's marketing team thank you so much for joining us for our linkedin live i'm here with bob buchanan who heads up our business transition planning here at comerica bob welcome thanks susan great to be back great to have you here and we're continuing on with our series with you uh today we're talking about does selling to a strategic buyer make sense for your company so before we get started i'm going to ask you just to explain to us what is the definition of a strategic buyer sure a strategic buyer as opposed to a financial buyer or other types of buyers is a buyer who has some sort of synergy with your company so they might be in the same industry they might be a competitor they could be in your supply chain a supplier or possibly a customer or someone who sells something similar to what you sell and maybe wants to take advantage of your customer base so it's somebody who it's a company that that has a synergy that adds value just by purchasing you there's no particular additional return they need they can get something just by owning your company okay so for those of you who are watching us i just wanted to mention if you have any questions for bob go ahead and put them in the chat i'll be monitoring those and we'll get to some questions a little bit later on all right let's get to our next slide bob this one we always use because it's really important to note that there are going to be a lot of people who transition their business over the over a 10-year period here explain more about that so susan we always start with this slide because it talks about the the prevalence of people who are thinking about transition in the timelines and we don't think about the dollar amounts associated with these but more than 50 percent of all business owners are thinking of transitioning over a 10-year period that's trillions of dollars of wealth that are going to transition in some way and when we think about that vast amount of of value and the number of people that is it's it's hundreds of thousands of people uh maybe millions of business owners who are going to do something different with their lives and something different with their companies and so just putting it into perspective is important the other thing is i i love to to look at the one little slice of that pie that talks about the percentage that's never going to transition um and i i just it always cracks me up that people believe honestly believe they will never transition from their company because at some point in some way they must right so you want to make sure you're doing all the proper planning as much as you can correct all right bob so let's go into there are many ways to make a transition give us an idea of some of those uh ideas for transitioning so there's all kinds of things you can do and you can do combinations of transitions a lot of business owners transfer businesses to their family they keep them in their family for long periods of time generations other business owners will transition out as managers but hold the business and keep the business in their own ownership uh others will sell to management teams some will sell to employees either directly or through employee stock ownership plans and then there are those who will sell directly to third parties and those third-party sales are what we're talking about today and that could be a financial buyer or what we just talked about a strategic buyer okay well the good news is there are a lot of different ways to transition your business so let's talk more about the financial requirement you need to know whether it's financially feasible to do the kind of transition that you want to do so tell us more about that that's right and we always start with this so when the next slide talks about this as well but when we talk about planning for your future planning for transition it doesn't make any sense to begin that conversation anywhere except what is acceptable to you financially and so to do that you have to understand where you are financially and what you need to live the rest of your life the way you want to and if transitioning your business in in one manner doesn't get you there then you have to consider other ways because the worst thing the worst outcome is to transition out of your company and then not be able to live the way you wanted to live not get what you expect and so when we think about what we have and what we need sometimes there's a gap there's not always many business owners have everything they need and what they get from their company is just gravy but for others there's a gap and that business has to fill the gap and maybe it can and maybe it can't and if it can then you have to think about how so will it fill the gap through a sale getting the value out of that business or through ongoing cash flow or some combination of the two okay so let's move on to specifically if we're trying to reach a strategic buyer what are some of the steps you're going to take so again we start with that that personal planning you have to understand what it is you're trying to achieve from a financial perspective and from a non-financial perspective and so thinking about a strategic buyer doesn't make sense for everybody not everybody just wants to walk away from their business which is typically what happens with a strategic buyer they don't particularly need you in an ongoing basis so they're going to come in by your company and then they have a management team in place and they have a plan of what they want to do with your business so you have to think about all of those factors and how they interact with one another and some of the factors you have to think about are things like legacy and family what do you want to happen with your business and so for many people this is such an emotional decision that it outweighs the financial impact um again especially if you have enough money already to live your life they tend to business owners will tend to make decisions based on emotions and those emotions are driven by things like family community philanthropy legacy employees all those factors that are really non-financial even though there's a financial aspect to each one of those okay and how about other important considerations for people well you have to think about um again the the financial analysis is not an other consideration it's sort of the key consideration most of the time um and that flows into pre-sale planning so have you done tax planning have you done transfer planning that you want to do have you done philanthropic planning to take advantage of maybe some tax savings in the sale of the business the structure of a deal of a transaction is absolutely paramount to reducing risk and making sure that you get what you want out of a transaction and by structure i mean how are you going to receive the proceeds of the transaction are you going to get all cash up front will you take stock in the company that's buying you will it be some combination of the two is there a debt component some some businesses when they sell they hold a note is there an earn out and what are the reps and warranties that you have to sign and so those are the representations and warranties uh related to a transaction and your company all of those things increase or decrease risk uh and and can change the value of the business uh proceeds from a present value basis so if you get all your cash up front you're better off than if you get some of it upfront and some of it later both from a present value perspective and a risk perspective okay bob so it sounds like you really need to take all of this into consideration while you're in the process of still running your business uh in order to really make the best decision for you right susan in fact it's it needs to be considered way before you enter any process of selling your business if you're going to sell and you've decided to sell to a strategic buyer before you go to the process of of entering a sale process you really should start very early understanding your financial needs really exploring what it is you want to accomplish from a non-financial perspective and then trying to tie the two together so that at the end of the day when you're making decisions based on non-financial factors you understand the financial impact and when you're making decisions on purely financial factors you understand the emotional impact or the non-economic impact okay so right now we just gave an overview of what people need to consider and it's kind of it's a lot of information for someone if they're not yet at any of these stages so give us kind of your key takeaways what you hope people would take away just from watching this well i i think in any transition process the the first thing is to understand your needs and plan early you know that that group of people who are never going to leave you know if they don't plan they're all going to leave but if they don't plan they're not going to leave well and as with any process the more you plan for it and the better prepared you are the more likely you are to be successful and the more likely are you are to have a higher level of success and so that planning piece is one that a lot of people know that they need to do and they put off until somebody knocks on the door and offers them something for their company and then they're not prepared so really the financial and non-financial planning is the most important piece prior to the actual structuring of a transaction second i think it's it's key to understand that different types of transactions or transitions can create very different outcomes and if you are a seller who or a company owner who wants to sell and wants to walk away from your business without having a lot of ongoing either responsibility or requirement to work in the business or to be involved later selling to a strategic buyer may be your best bet in doing that as long as you understand the risk and benefits of that kind of a transaction well let's say someone is watching this and they think okay the strategic buyer option sounds like a good one then how would they go about finding that buyer so finding a buyer is really you know a later step it's when you've entered the transaction or the process of selling your business in my experience the best way to find a strategic buyer i i think there's two really good ways one first is to hire an investment banker right an investment banker is someone who will run that process for you who will make sure that that process is done in a way that doesn't let your competitors and customers know that it's happening or your employees the last thing you want is to alert the marketplace that you're selling because it could really disrupt your business especially if that that transaction may not be successful the first time around you don't want to create all those waves secondly an investment banker will understand who the best buyers are and they'll look into the marketplace to see who is is acquisitive what companies that might be strategic buyers are already active in in mergers and acquisitions thirdly they keep you focused on your business so an investment banker will run that process for you help you negotiate help you structure the transaction explain to you what all of the pitfalls are and let you focus on running your business because the worst thing that can happen is you go through a process and you're not focused on running your business and your business starts to suffer because of it you'll end up with less money and or a failed process and then a business that isn't doing as well somebody wants that nobody wants that the second way is um you don't have to use an investment banker a lot of people already know who their best buyers might be so you know who your competitors are you know who your clients are you know who your suppliers are those are three really easy categories of potential strategic buyers there are other categories out there so adjacent similar businesses but those are harder to identify and find an investment banker can help do that so if you know who your buyers are i would say bring in a financial advisor bring in a good transaction attorney a good accounting team and you can approach those buyers without an investment banker it's a little riskier because they immediately know it's you and your company an investment banker will do it in a way that they don't understand or they don't know yet who they're they're considering buying they'll give details of a company without giving your name so it's a little riskier without that but those are both ways of doing it okay another question bob is uh strategic buyers you say they often the business will go for the highest price with a strategic buyer can you explain why that is yeah and that's not always true but it's sometimes true um and often true in fact so strategic buyers as i said at the very beginning have some sort of synergy with your company they can get some value above what they're going to pay you above fair market value of your business be just because of of their operation and so imagine a business that does something similar to what you do and is is going to buy your business and expand geographically but they don't need all of your locations so they're going to they're going to pay you they're going to get more value than than you get from the business just because of who they are they'll be able to eliminate layers of management because they already have that management in place maybe they already have a sales team in place and they can eliminate your sales all of those eliminations drop to their bottom line that expansion drops to their bottom line and they don't really have to do anything to get there they don't have to invest anything other than buying your business and so they're willing often to pay you some percentage of that synergistic value they're not going to pay you all of it because it's the value they bring to the table but maybe they'll give you some of it to convince you to sell to them rather than someone else okay that makes a lot of sense bob we had quite a few people joined us kind of mid broadcast here so just wanted to let everyone know who's watching that this the replay of this will stay on our linkedin page if you want to watch the beginning of it later so thanks everybody for joining us above as we wrap up anything else that you would like to mention no i i think it's just it's really important susan is and i'll say this all the way through every time we talk that the planning piece shouldn't be ignored that piece should start early and it should be focused an area focused every year until you're actually ready to transition so goals and objectives change over time what people want to accomplish will change over time their business changes over time and when they start this planning process they may be headed one way and by the time they get to an actual transition they may be headed a completely different way but if you don't start the planning early you won't recognize the benefits and risks of all of those different alternatives and you'll end up probably maybe not probably but you're you're much more likely not to end up looking back five or ten years later and saying i could have done something better okay so one last question that is it ever too early to start this uh process it's really never too early um and the businesses that i've owned in the past and very successful entrepreneurs i've spoken with have started their businesses with an end in mind and so the day that you begin your company is a day you should start thinking about how you're going to transition out of it and when okay great advice bob thank you so much and thanks to everybody who joined us live here have a great rest of the day everyone great thanks susan thanks you