What Are the Types of Business Buyers
Today's episode of the podcast, Robert Hirsch from Freedom Factory discusses "What Are the Types of Business Buyers". https://freedomfactory.com/buy-a-business/
Listen to the podcast, watch the video, or read the transcript below.
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Transcript of Podcast
Hi, Robert Hirsch from Freedom Factory. And I just had this really interesting question, and it was from a buyer of a business. And in one of my other videos I was talking about different kinds of buyers, right? There's first-time buyers, entrepreneurial buyers, strategic buyers, and we'll go into a whole host of them. But, but he said, well, what kind of buyer am I? I'm not sure. And I made the joke, I said, well, that means you're a first-time buyer. He was actually a serial entrepreneur and we got a good kick out of it. But I wanted to talk about the different types of buyers for businesses. And this is important not just to buyers, but to sellers because we're going to have different campaigns for different styles of buyers.
So let's talk about the first one. And this is what I affectionately refer to as the first time buyer. These are people that traditionally leaving the corporate world. They've got a great education and they're saying, should I buy a business or should I buy a franchise? And sometimes franchises look good to people coming from the corporate world because they have systems and processes and they sell franchises often sell on fear. They say, well, you can't get a big account if you're not part of a national company with a national marketing campaign, you're going to get a really big leg up.
In my experience, that hasn't been true. We've sold a lot of franchisees in the past. But the reality is when someone makes a decision for you, they're not making a decision based upon the sign behind you or the name they want you. And so if you're a sign maker and they go to a national sign franchise, they're not going to say, well, that sign franchise is great signs.
They'll go with them. They say, you know, Robert, I really trust you and I think you can make a kick-butt sign for me. Let's do this. And so I often recommend to my corporate kind of people making the big transition and the big jump to look at businesses that have been around for a long history, that have a great track record and great sales and really good systems and processes. So that makes a transition as easy as possible. But that's really the first time buyer. And so businesses like that service businesses are great, product businesses are good, but ultimately you want something where your skillset is really going to add to the business.
The second type of buyer is serial entrepreneurs like me and I’ve been doing this for 29 years. I've been in every business I can think of, and some have gone well and some haven't, but overall more have done well than haven't. And I usually transition every two to five years. A lot of entrepreneurs, you do your best and let's say you're going to 100% a year or 150% a year, and all of a sudden you dropped a 10 or 15% and it turns more operational. For me, when it gets operational, there are people better suited to it than me, so I'm happy to sell it to them and get in something where I can be more strategic.
And so as an entrepreneur or a serial entrepreneur, I like to look for strategic businesses where you can really dramatically shift the line, maybe something where you're buying it fairly inexpensively and someone owns a job and doesn't own a business. I talk about the difference between that, but the bottom line is if you don't know if you own a job or a business, you just stopped showing up.
And if the revenue goes up, you own a business. If it goes down, you own a job. And there's a lot of value to be created. Transitioning people owning jobs into owning businesses. Other strategic buyers like that, if for example, let's say you came out of an industry that you have a lot of connections in and you can really leverage it in this next business. I've seen entrepreneurs buy businesses for five times earnings. So let's just say in this example, it's $1 million and it throws $200,000 200,000 times five is a million dollars, and that's its market cap or what it's worth. And they buy it and they can pay it off and sometimes is as quickly as three or four months.
We had a travel technology business. The guy came out of the travel technology space. He made three calls. All of a sudden he's on Orbitz, Expedia, and Travelocity, and the business has grown six X in a fraction of a year. Amazing things can be done there, and that's kind of the entrepreneurial or the strategic buyer.
We also have the financial buyer, which is private equity or venture capital, and they can be buying it for different reasons. They can buy it as a standalone. The good news is I love dealing with private equity and venture capital groups because usually they have a set of deal criteria. They're very specific on, they're looking forward to meet five criteria. We need to have debt to equity of this. We need to have earnings of this. We need to be able to buy it on these terms. And if your business fits that buyer, it's usually a very quick and smooth transaction. No fundraising, no SBA loans, nothing along those lines.
But sometimes when you're a seller, you want to put yourself in the buyer's shoes. So for example, we've helped private equity groups do roll-ups, and what a roll up is you buy a company, maybe that's at the center of it. We did a roll up business in the software as a service space. They would buy it for the customer set and for the software. And then they buy the three major competitors, and let's say they're doing $1 million in earnings, so $1 million in earnings, and let's say in this multiple, they're probably doing four maybe five times that earning. So the cap is with four or 5 million.
Well, if you stick those three companies together, now a company doing 3 million might be worth six to seven. So what they bought for 12 million all of a sudden is worth 20 million. So that type of financial engineering is usually going to come from a financial buyer or private equity or venture capital group.
The final buyer is a strategic buyer and strategic buyers are you usually buying for a few things? Right? They're buying gross margin because that margin if they're acquiring more than 80% of the company, goes directly into their financials, but sometimes they're buying to either Aqua hire, meaning they're trying to get the people and the skillset and being able to do that. We just saw that recently with one of our deals.
We've also seen the financial buyer, the strategic buyer come in and buy companies because they just wanted to own it. For example, recently a ski rack manufacturer bought a rooftop tent manufacturer and the ski rack manufacturer was a hundred times bigger. Certainly could have reversed engineered these tents, but they wanted the people, the skillset, and they wanted their customer base.
And the great news about strategic buyers, they're usually less worried about the multiple of earnings and they're more worried about buying a great company. So if you're not sure what type of buyer you are, just go through it and figure out which one fits best. And if you have questions on this or anything even similar to it, just give us a call at Freedom Factory and please hit like and subscribe.
Thank you so much for spending your valuable time with us and we'll see you soon. Please like and subscribe.
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