Why Business Buyers Buy Businesses

Most business owners decide to sell out for three broad reasons. They may decide to sell their business for personal reasons including retirement without a successor, an unresolvable partnership dispute, or illness. Corporate-level reasons such as escalating costs or the loss of key personnel may emerge causing them to sell. Finally, market-level or economic conditions may be too enticing, including favorable tax changes or mounting regulatory challenges. For a business buyer, however, the key motivations vary considerably from buyer to buyer. Knowing what motivates a buyer to make an acquisition will help an owner position their business to achieve the maximum price and most favorable terms when it comes time to sell.

Here are the top 5 reasons a buyer will acquire a service business:

  1. Seeking Revenue Growth – Most private businesses will expand organically and not by making one or more acquisitions. In cases where organic growth is not occurring, or where investors want to grow more aggressively, executives may look to augment their own revenue growth by acquiring another business. If the seller has a stable base of long-term (preferably contracted) clients, without concentration risk, a buyer will be willing to pay a higher purchase price with more favorable terms to the seller.
  2. Increasing Profits – If the buyer is already in the business, they will seek to increase profits by removing duplicative costs. This will happen by combining business functions such as payroll and human resources. Buyers may also employ a strategy where “best practices” prevail, or they may seek to keep their own team and infrastructure in place and eliminate redundancy. Knowing this, a business owner can highlight their own company’s strengths during their selling process.
  3. Seeking Diversification – Companies seeking to add a new service offering, or expand their reach into a new geographic region, may determine that they could acquire a company cheaper and quicker than by growing organically. Owners who have a competitive foothold in a particular geographic region, or in a particular market segment, will generate a higher selling price than companies without any barrier-to-entry in their market.
  4. Accessing Cheap Capital – At times where the cost of capital is lower and readily available, business buyers will pursue acquisitions more aggressively as their returns will be more favorable. For example, during the years leading up to the Great Recession business buyers were able to secure financing at very attractive rates. Once the financial crisis set in, many banks ceased lending and rates dramatically increased forcing many buyers to the sidelines. Owners contemplating a sale should pay attention to financial market conditions because access to inexpensive financing will impact some buyers’ ability to transact.
  5. Implementing a Rollup Strategy – In the U.S. accounts receivable management industry, for example, there was a ten year period from 1997 to 2006 when private equity firms were driven by a “rollup strategy.” Outsourcing Solutions (OSI), a company formed by a proven leader and a private equity firm, bought numerous companies to quickly amass revenue. They acquired competitors Union Corp. and Payco American even though their client bases overlapped considerably. Integration was not part of their strategic plan.

Today, roll-ups still exist within certain market segments and they are done with more of a purposeful intent to integrate the businesses and remove duplicative costs. Desirable markets for roll-up strategies in 2018 include healthcare and government. Companies in these market segments will attract more buyer interest and competition will drive pricing upward.

Knowing what motivates a buyer will help owners position their company for the best possible deal when it comes time to sell.