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Know Your Buyers. Dispel the Myths.
The first step in getting a business sale across the finish line is knowing your buyers: who they are, what they're looking for, and how you can help them set realistic expectations and steer clear of common errors. Dispelling persistent myths about buyer motivation is an important key to that process.
We will review some of these myths below, using data from the 2018 first-quarter Market Pulse survey of the International Business Brokers' Association. Several key pieces of information have turned up in this report:
- Local buyers, first-time buyers and serial entrepreneurs are all heavily represented in sectors of the market that deal with transactions of $5 million and below
- "Buying a job," or the acquisition of a business at which one expects to work long hours to have the stability of "being one's own boss," is a surprisingly common motivator in buyers up to the $5 million threshold
- Horizontal expansion, wherein businesses seek to expand their existing model to new outlets, was the second-most-common motivator in the $5 million and under sectors of the market
- Private equity firms dominate transactions of $5 million to $50 million
From this data we can address a few common myths about business buyers.
Myth 1: Buyers Know What They Want
You will often see stated as fact that buyers have the advantage in any business sale, as they are the ones likelier to show up to the table, having researched all the ins and outs of the transaction and in full command of what they want. In fact, this isn't often the case.
First-time buyers and serial entrepreneurs comprise a large part of the market for transactions up to $5 million. They are just as vulnerable as sellers to lack of planning, missed steps and unrealistic expectations. Transactions at price ranges above $5 million are dominated by private equity firms and existing companies, but even these entities can make errors in approaching a sale. It is not uncommon to hear of buyers at any price range entering negotiations without having evaluated whether a business fits their skills, personality or financial goals, or whether their firm is proposing to deliver something that the community they'd be serving actually needs or wants, among other errors.
Myth 2: Buyers Are Rational
Closely related to the first myth is the notion that because buyers are often compelled to be very deliberate about the decision to buy, this decision is rational and not emotional. This is just as untrue as the first myth. A buyer isn't purely rational after having done research and due diligence, especially given the number of buyers who are motivated by "buying a job" or a new lifestyle, or who are party to large and high-stakes transactions whose outcome directly affects their livelihood. It's still important for brokers to understand the emotions that buyers, as well as sellers, bring with them to each transaction.
Myth 3: Money Is the Buyer’s Prime Motive
It's certainly true that in dealing with a private equity firm looking into platform or add-on acquisitions in a market, or an existing company seeking an asset that would improve return-on-investment in some part of its portfolio, you are dealing with profit-driven entities. But money is not the sole motivator for buyers in other sectors of the market. First-time buyers often are looking for a stable business they can work at themselves and "be their own boss," as the saying goes. They may not be coming to a deal with any expectation of immediate profitability, and sometimes should not be.