Internal vs. External Sales
Mar 10, 2021
While there are many different types of business buyers, they all fall within two categories: Internal Buyers and External Buyers. Deciding early on where you want to focus your energy will make for a smoother transition and eliminate any last-minute second-guessing.
We can’t generalize which type of buyer or which category is best because every seller has his or her own unique situation, and each individual’s situation can vary from year to year. At O&O, we analyze each of our clients’ businesses and exit goals and then look at the pros and cons of each buyer category as it relates to that business.
Consider these pros and cons of the different types of buyers:
| Internal Buyer Type | Pros | Cons |
| Family Members | Intimate knowledge of who is taking over; continuing a legacy | Most of the time, sellers don't get their optimum price and usually finance most of the price; senior employees may see their promotion opportunities minimized |
| Individual Employee | See Family Members above | See Family Members above |
| Employee Stock Ownership Plan (ESOP) | Seller can defer or eliminate income taxes on the gains | Must have a strong management team; costs to start and maintain the ESOP are high; often the seller continues involvement for a period of time |
| Management Buyout (MBO) | May ease concerns among customers if team is strong | Sellers often will finance a larger portion of the price than they would for an outside buyer |
| External Buyer Type | Pros | Cons |
| Strategic Buyer | Synergies between companies usually bring a higher price; may ease concerns among customers | If there are redundancies, some employees may lose jobs; occasionally the facility is eliminated |
| Private Equity Groups | Strong financial resources to support an optimal price; location of business not an issue; owner may retain equity | Owner may have a longer transition out of the business; owner may be asked to retain equity; if there are redundancies, some employees may lose jobs; the business might be sold in a few years |
| High Net-Worth Individual | Buyer usually plans an active role, allowing seller to exit sooner | May require more owner financing |
| Family Office (group that handles multiple high net-worth families' finances) | More funds are typically available | Owner may have a longer transition out of the business |
While often not the first choice, in some cases liquidation is a good option. Some heavy asset-based companies are worth more in liquidation than they would be worth to a new owner.
These are just some of the things we take into consideration when consulting with our clients. Every situation is different and requires a thorough analysis to determine the best approach to finding buyers. For more information or advice on determining the right kind of buyer for your business, call O&O at 913.648.0185 or email michael@ok-om.com.