This is the third of ChemQuest’s six-stage “Sell-Side Readiness Playbook,” our framework for preparing specialty chemicals and formulated products businesses in achieving maximum value in a sell-side transaction. The first post in this series discussed the first two stages, highlighting the importance of (1) getting your own house in order by cleaning up operations and (2) building a convincing narrative for buyers.
We now turn that scrutiny outward, onto the buyer’s side of the table. In the lower-middle market, “the buyer” isn’t just one type of counterparty. From strategics and private equity to family offices and SBA-backed buyers, each is unique and will show up at the closing table differently. Sell-side processes benefit when owners understand these various profiles, which come with specific goals and preferences.
Regardless of the buyer type, however, owners can and should vet the buyer’s financing before signing a letter of intent (LOI). This mitigates the risk of a deal falling apart 60 days from close. The highest offer on the table means nothing if the buyer can’t actually close it.
Four Buyer Types
Business owners encounter four buyer types throughout the sell-side process: strategic acquirers, private equity platforms, family offices, and Small Business Administration (SBA)-backed individual buyers and search funds. Understanding the motivations and challenges unique to each subset helps determine the best fit for your sell-side process.
Strategic acquirers seek fit and synergies. They’re often the fastest to underwrite, since their funding is readily available through existing balance sheets or credit facilities. However, they scrutinize integration and overlap the hardest. Strategics are also most likely to displace or altogether remove your existing leadership once the deal closes.
Private equity (PE) platforms move fast and pay competitively, but their financing runs through a lender or fund-level debt commitment — real, but a step removed from cash in hand. Owners may have the option to transfer (“roll over”) part of their sale proceeds into new equity, allowing them to share in the upside under the new PE ownership. Expect a 3- to 5-year holding period for the asset, and a transformation agenda once acquired. Removing costs is usually a priority and an initiative that moves expeditiously.
Family offices are becoming an increasingly active piece of this market, and they behave as somewhat of a hybrid of strategics and PE. Typically buy-and-hold, family offices are patient and permanent capital-funded from their own balance sheet, which means a high certainty of deal-close and few financing contingencies. They also typically seek minimal transition disruption; they’re buying stable, growing profits, not a turnaround, so they tend to retain existing management and maintain the same operating rhythm, rather than impose a 100-day plan. The profile sounds ideal, but the trade-off is that family offices rarely match a competitive auction’s top bid.
SBA-backed individual buyers and search funds are common in smaller, lower-middle-market deals. Their financing is contingent on SBA 7(a) underwriting, where lenders require a roughly 1.25x debt-service coverage, a credible buyer track record, and clean and complete financials. These deals can be excellent outcomes, but they take a longer time to close and are most likely to stall if your books aren’t in order or the buyer’s side is less experienced. A seller note in the capital stack is one way to strengthen and expedite the deal while also signaling your confidence in the business by acting as a lender.
The Question that Protects the Outcome
The key question when evaluating buyers and offers shouldn’t be, “Who bid the highest?” Instead, sellers should ask, “Which path has the highest probability of success?”
Several practical steps are worth taking before owners get too deep into a sell-side process:
- Ask for proof of funds or a capital commitment letter early. A legitimate buyer (of any type) shouldn’t be offended by this request.
- Ask a PE buyer about their fund-level approval process and how far along they are in securing the capital.
- Ask an SBA-backed buyer about their lender relationship and how far along the underwriting process is. A pre-qualified buyer with an engaged lender carries a much-reduced risk profile than one who hasn’t begun the process.
- Weigh certainty against headline price, not just price alone. A family office offer at a modest discount to a competitive PE bid may be the better option if certainty of close and post-close stability are paramount to you and your team.
Chasing the highest number on a term sheet without confirming that the capital behind it is committed is one of the most common — and most expensive — mistakes we see. A deal that falls through 60 days before close typically costs more (in time, morale, and market perception) than what is foregone financially from a lower bid that offers greater certainty.
You’re Not Alone
This is the kind of judgment call that’s hard to make alone, especially the first time you’re selling a business. Our team at ChemQuest has deep experience working with all buyer types to deliver successful outcomes; we understand their needs and motivations, as well as the particular benefits and drawbacks each may offer for your specific situation.
Our team works alongside sellers throughout the buyer engagement process, helping to vet financing credibility and decoding the real incentives behind a term sheet. What’s more, we are able to tap a specialty chemicals and formulated products buyer network spanning all buyer types to help you evaluate all options and reach an optimal deal structure.
In the next part of this series, People & Succession Readiness, we’ll discuss the importance of getting ahead of key person risk, critical role dependency, turnover, and non-competes — before diligence surfaces them.
How can we help you? Let’s start talking: https://chemquest.com/lets-start-talking/
