A Listing Agreement is More than Just a Piece of Paper
In order to sell one’s business using the services of a business broker, a listing agreement is almost always required.
For the owner of the business, signing the agreement legally authorizes the sale of the business. This simple act of signing represents the end of ownership. For some business owners, it means heading into uncharted territory after the business is sold. For many it also signifies the end of a dream. The business owner may have started the business from scratch and/or taken it to the next level. A little of the business owner may always be in that business. The business, in many cases, has been like a part of the family.
For buyers, the signed listing agreement is the beginning of a dream, an opportunity for independence and the start of business ownership. The buyer looks at the business as the next phase in his or her life. Pride of ownership builds.
So, that simple piece of paper – the listing agreement – is the bridge for both the seller and the buyer. The business broker looks at that piece of paper through the eyes of both the buyer and the seller, working to help both parties progress through the business transaction process into the new phase of their lives.
Read MoreA “Pig in a Poke”
Once a buyer has negotiated a deal and secured the necessary financing, he or she is ready for the due diligence phase of the sale. The serious buyer will have retained an accounting firm to verify inventory, accounts receivable and payables; and retained a law firm to deal with the legalities of the sale. What’s left for the buyer to do is to make sure that there are no “skeletons in the closet,” so he or she is not buying the proverbial “pig in a poke.”
The four main areas of concern are: business’ finances, management, buyer’s finances, and marketing. Buyers are usually at a disadvantage as they may not know the real reason the business is for sale. This is especially true for buyers purchasing a business in an industry they are not familiar with. The seller, because of his or her experience in a specific industry, has probably developed a “sixth sense” of when the business has peaked or is “heading south.” The buyer has to perform the due diligence necessary to smoke out the real reasons for sale.
Business’ Finances: The following areas should be investigated thoroughly. Does the firm have good cash management? Do they have solid banking relations? Are the financial statements current? Are they audited? Is the company profitable? How do the expenses compare to industry benchmarks?
Management: For a good quick read on management, the buyer should observe if management is constantly interrupted by emergency telephone calls or requests for immediate decisions by subordinates? Is there a lot of change or turn-over in key positions? On the other hand, no change in senior management may indicate stagnation. Are the employees upbeat and positive?
Buyer’s Finances: Buyers should make sure that the “money is there.” Too many sellers take for granted that the buyer has the necessary backing. Sellers have a perfect right to ask the buyer to “show me the money.”
Marketing: Price increases may increase dollar sales, but the real key is unit sales. How does the business stack up against the competition? Market share is important. Does the firm have new products being introduced on a regular basis.
By doing one’s homework and asking for the right information – and then verifying it, buying a “pig in the poke” can be avoided.
Read MoreCompany Weaknesses
Take two seemingly identical companies with very similar financials, but one of the companies was worth substantially more than the other company. One company will sell for $10 million “as is” or some changes can be made and the same company can be sold for $15 million. Following is a partial list of potential company weaknesses to consider in order to assess a company’s vulnerability.
Customer Concentration: First, one has to analyze the situation. The U.S. Government might be considered one customer but from ten different purchasing agents. Or, GM might have one purchasing agent but be directed to ten different plants. One office product manufacturer with $20 million in sales had 75% of its business with one customer…Staples. They had three choices: 1. Cross their fingers and remain the same; 2. Acquire another company with a different customer base; or 3. Sell out to another company. They selected the third choice and took their chips off the table. The acquirer was a $125 million competitor which was unable to sell to Staples, so after absorbing the smaller company, the customer concentration to Staples was only about 10% ($125m + $20m=$145m of which $15 million was sold to Staples or 10+%).
Single Product: Perhaps the most famous example of a single product acquisition is when General Motors overtook Ford’s single product, the Model A, with Alfred Sloan’s brilliant concept of a different model for people with different financial thresholds. Henry Ford’s stubbornness to stay with one product (Model A) almost cost the company its existence.
Regional Sales/Limited Marketing: Companies with parochial focus have limited capabilities to grow other than within their own domain. A widget company with national and international sales has substantially greater prospects to grow than one limited to its own region.
Aging Workforce/Decaying Culture: Skilled workers in certain trades, such as tool and die shops, are not being replaced by the younger generation. This is a sign that the next generation will not provide the companies with a skilled workforce in certain industries.
Declining Industry: Some companies are agile enough to completely change their industry, such as Warren Buffet’s Berkshire Hathaway and Fashion Neckwear Company which completely changed from neckties to polo shirts.
Pricing Constraints/Rising Costs: Companies who sell a commodity product often lack pricing elasticity and are unable to pass on their increased costs to their customers. For a while, the steel industry was in this predicament, but through massive industry consolidation and a booming demand from China, the situation changed.
CEO Dependency/No Succession Plan: Many middle market companies have successfully been built up by the founder/entrepreneur/owner and some critics call these individuals a “one-man-band” for good reason. These superman types tend to dominate most aspects of the company, but this is no way to build a sustainable business long term. Furthermore, these CEOs usually have not created a succession plan.
Maximizing Value
If the owners of a company, many of whom may be outsiders, want to increase the value of their investment, they should, through the Board of Directors, try to overcome the company’s weaknesses. On the other hand, the CEO may not be either capable or motivated to do so. The alternative is to implement a CEO succession plan, preferably with the cooperation of the current CEO. Kenneth Freeman’s thesis in “The CEO’s Real Legacy” (Harvard Business Review, Nov 2004) is that the CEO’s real legacy is implementing a succession plan.
Freeman advises:
“Your true legacy as a CEO is what happens to the company after you leave the corner office.
“Begin early, look first inside your company for exceptional talent, see that candidates gain experience in all aspects of the business, help them develop the skills they’ll need in the top job…
“During good times, most boards simply don’t want to talk about CEO succession…During bad times when the board is ready to fire the CEO, it’s too late to talk about a plan for smoothly passing the baton…Succession planning is one of the best ways for you to ensure the long-term health of your company.”
Both buyers and sellers should assess the company’s weaknesses. While some weaknesses are difficult to overcome, especially in the short term, one potential weakness that is very easy to overcome is to implement a succession plan…especially during the company’s good times before things go bad and it’s too late.
Read MoreQuestions to Consider for the Serious Buyer
A serious buyer should have the answers to the following questions:
- Why are you considering the purchase of a business at this time?
- What is your time frame to find a suitable business?
- Are you open-minded about different opportunities, or are you looking for a specific business?
- Have you set aside an amount of capital that you are willing to invest?
- Do you really want to be in business for yourself?
- Are you currently employed or unemployed?
- Are you the decision maker, or are there others involved?
The real key to being a serious buyer, however, is whether the individual can make that “leap of faith” so necessary to the purchase of a business. No matter how much due diligence a buyer performs, no matter how many advisors there are to advise the buyer, at some point, the buyer has to make a leap of faith to purchase the business. There are no “sure things” and there are no guarantees. If a buyer is not comfortable being in business, he or she should not even contemplate buying one.
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Who Buys Small Businesses? A Seller’s Guide to Buyer Types
By Troy Frank, Owner — Indiana Equity Brokers Estimated read time: 8 min
The short answer: Small businesses in Indiana are most commonly purchased by individual first-time buyers using SBA financing — this describes the majority of Main Street transactions under $1 million in earnings. Other buyer types include strategic buyers (often competitors who pay a 20–30% premium), search fund buyers (MBA grads or corporate managers buying to operate), private equity (rarely interested below $500,000 in EBITDA), and existing business owners buying a bolt-on. Knowing which buyer type is most likely for your business changes how you price it, how you market it, and what deal terms to expect.
Most sellers think about the price they want. They spend less time thinking about who, specifically, is likely to actually buy their business — and what that buyer cares about.
That’s a mistake. The type of buyer you attract determines your price, your deal structure, how long the sale takes, and how the transition goes. A strategic buyer and a first-time individual buyer will look at the same business in completely different ways.
This article covers the five main types of business buyers, what each one looks for, what they typically pay, and what it means for how you should approach your sale. For sellers at the Main Street to lower-middle-market level, this is the buyer landscape you’re actually working with.
1. Individual Buyers — The Most Common Buyer for Main Street Businesses
The vast majority of small business sales in Indiana involve an individual buyer. This is someone buying a business to own and operate themselves — replacing a job, building independence, or putting their career experience to work as an owner rather than an employee.
Individual buyers come from all backgrounds: corporate managers, military veterans, former executives, entrepreneurs looking to skip the startup phase. What they share is an intention to run the business themselves and the need to finance most of the purchase.
What They Pay and How
For Main Street businesses — roughly those under $1–2 million in annual earnings — individual buyers typically pay 2–3x seller’s discretionary earnings (SDE). This is the market multiple for these deals, and individual buyers generally pay it rather than a premium above it.
Almost all individual buyers use SBA 7(a) financing for the acquisition. The SBA requires a 10% equity injection, a minimum 680 FICO score, and at least two years of relevant management experience. The business must show a debt service coverage ratio of at least 1.25x — meaning the cash flow must comfortably service the acquisition debt.
What They Care About
Individual buyers want to know they can run the business without you. The biggest risk factor for this buyer type is owner dependence. A business where the owner is the primary rainmaker, the key technical expert, or the face clients trust creates uncertainty about what happens after the transition. Businesses with documented systems, a capable staff, and customers who buy from the company — not from the owner personally — command higher prices and attract more qualified individual buyers.
Timeline
SBA-financed deals typically take 60–90 days from signed letter of intent to closing. The financing process, appraisal, and lender underwriting drive most of that timeline. Total sale timeline from listing to close: typically 6–12 months for a well-prepared, fairly priced business.
2. Strategic Buyers — Often the Highest Offer You’ll Receive
A strategic buyer is a company — or sometimes a well-capitalized individual with an existing business — acquiring your business because of what it adds to what they already have. Competitors, suppliers, adjacent businesses, and companies looking to expand into your geography are all strategic buyers.
Strategic buyers frequently pay more than individual buyers for the same business. The reason is straightforward: they’re buying something worth more to them than the standalone earnings suggest. Your customer relationships, your market share, your employees, your territory — these have strategic value that goes beyond what the income statement shows. Strategic premiums of 20–30% over financial buyer valuations are common.
The tradeoff is confidentiality risk. A strategic buyer is, by definition, already in your industry. They know your competitors, your customers, and your market. That means information disclosed during due diligence is valuable to them even if the deal falls through.
This is why we always manage the process carefully when a strategic buyer is in the picture — a proper NDA, staged disclosure, and a broker as the communications buffer between seller and buyer. We covered this in depth in our post on selling a business to a competitor. If a strategic buyer has reached out to you directly, that post is worth reading before you respond.
Strategic buyers can often move faster than individual buyers — they don’t need SBA financing and they understand due diligence. But the deal terms, particularly the non-compete, will reflect what they’re protecting.
3. Search Fund and ETA Buyers — The Category Most Sellers Miss
This is the buyer type that wasn’t on anyone’s radar a decade ago and is now a meaningful part of the acquisition market for Main Street and lower-middle-market businesses.
Search fund buyers — also called ETA (Entrepreneurship Through Acquisition) buyers — are typically MBA graduates or mid-career corporate managers who have decided to buy and operate a business rather than work for one. They’re not passive investors. They intend to step into the role of CEO and run the company themselves.
Why Sellers Should Care About This Buyer Type
Search fund buyers are sophisticated. They understand financial statements, deal structure, and due diligence. They ask good questions and move through the process methodically. They’re not intimidated by seller financing discussions and they often come pre-vetted by a search fund accelerator or investor network.
Many search fund buyers use SBA financing, which means the same underwriting requirements apply. But some have investor backing that allows them to move faster and with fewer financing contingencies.
What sellers often find valuable about this buyer type: they tend to be genuinely interested in what makes the business work. They want to learn from the seller, not just close the deal. A seller who cares about what happens to their employees and their customers after the sale often finds this buyer type a good fit.
What They Pay
Search fund buyers generally pay market multiples — they’re not going to offer a strategic premium, but they’re also not trying to lowball. They typically pay 2.5–4x SDE or 3–5x EBITDA for a well-run business with documented systems and a clear transition path. The multiple depends on business quality, not on the buyer’s strategy.
4. Private Equity — Mostly Irrelevant for Main Street, Worth Understanding for Mid-Market
Private equity (PE) firms acquire businesses to grow them and sell them at a higher multiple, typically within five to seven years. They’re professional acquirers who move quickly, pay in cash, and know what they’re doing in due diligence.
PE firms are also largely irrelevant for businesses under about $500,000 in annual EBITDA.
Most PE funds have minimum investment thresholds. A fund managing $100 million can’t meaningfully deploy capital into a $600,000 acquisition — the deal isn’t large enough to justify the overhead. The typical PE minimum is $1–2 million in EBITDA, and many funds won’t look below $3–5 million.
PE-Backed “Platform” Companies and Bolt-Ons
Where private equity does appear in Main Street deals is through their portfolio companies. A PE-backed platform company — an existing business in your industry that a PE firm has already acquired — may be actively looking for smaller businesses to acquire as “add-ons.” These deals combine strategic buyer motivation (synergy, market expansion) with the financial sophistication of private equity.
If your business is in an industry where PE consolidation is active — home services, healthcare, auto repair, landscaping, technology services — you may receive interest from PE-backed platforms even if a traditional PE fund wouldn’t look at your deal. These buyers often move quickly, pay well, and may offer terms that make the transition easier for employees.
5. Existing Business Owners — Motivated, Fast, and Often Underestimated
The final major buyer type is a business owner — in Indiana or nearby — looking to expand by acquisition. They may be in your industry or an adjacent one. They may be in a different geographic market looking to enter yours. They’re not a PE firm, but they have operating experience and often don’t need SBA financing.
This buyer type is sometimes overlooked because they don’t appear on listing sites the way individual buyers do. They’re not actively browsing BizBuySell. They’re identified through industry relationships, targeted outreach, or through a broker who knows the market.
What makes this buyer valuable: they understand operations, they can close without financing contingencies, and they often move faster than any other buyer type. They know what they’re buying and they don’t need education on how the industry works.
What they want in return: a clean deal, a reasonable price, and a seller who’s been transparent about what they’re selling. They’ll do thorough due diligence, but they don’t need the seller to walk them through every aspect of the business from scratch.
What Buyer Type Will Buy Your Business?
The practical answer depends almost entirely on the size of your business.
Under $1 million SDE: Your most likely buyer is an individual — a first-time owner using SBA financing. Your marketing should target this buyer, your pricing should reflect what an SBA-financed deal can support, and your transition planning should address what an individual buyer needs to be successful operating the business.
$1–3 million SDE or EBITDA: Your buyer pool expands. You’re more likely to see search fund buyers, existing business owners, and potentially PE-backed platform companies in addition to well-capitalized individual buyers. Competition among buyers at this level is higher, which tends to drive prices up.
Above $3–5 million EBITDA: Private equity becomes a realistic buyer. Strategic buyers are also more active at this level because the acquisition is large enough to move the needle. Deal complexity increases significantly, and having experienced representation — both a broker and a transaction attorney — is essential.
For most Indiana businesses we work with, the buyer is an individual or a strategic buyer. Understanding what each needs, and how to appeal to both simultaneously, is a meaningful part of how we approach the listing and marketing process.
Frequently Asked Questions
Who are the most common buyers of small businesses? For small businesses under $1 million in annual earnings, the most common buyer is an individual first-time owner using SBA 7(a) financing. This buyer is typically an experienced professional — a former manager, executive, or entrepreneur — who wants to own and operate a business rather than start one from scratch. Most small business sales in the Main Street segment close with this buyer type.
What is a strategic buyer in a business sale? A strategic buyer is a company or individual who already operates in your industry or an adjacent one, and is acquiring your business for what it adds to what they already have — customer relationships, market share, geographic territory, or specific capabilities. Strategic buyers frequently pay 20–30% more than individual or financial buyers for the same business because the acquisition has value beyond the standalone earnings.
Will private equity buy my small business? Most private equity firms require a minimum of $1–2 million in annual EBITDA to consider an acquisition, which puts them out of reach for the majority of Main Street businesses. However, PE-backed platform companies — existing businesses in your industry that a PE firm has already acquired — may be interested in smaller “bolt-on” acquisitions. If your industry is experiencing PE consolidation (home services, healthcare, landscaping, auto), you may receive interest from platform buyers even if traditional PE funds wouldn’t look at your deal.
What is a search fund buyer? A search fund buyer is typically an MBA graduate or mid-career professional who raises capital to find and acquire a single business to operate. These buyers are sophisticated, process-oriented, and motivated to succeed because they’re taking an operational role. Search fund buyers generally pay market multiples rather than a premium, but they’re often serious, qualified, and reliable counterparties in a transaction.
Does it matter what type of buyer buys my business? Yes — the type of buyer affects price, deal structure, timeline, and transition terms. A strategic buyer may pay more but require a longer non-compete. An individual buyer using SBA financing will need more time and may need seller participation in training. A PE-backed platform buyer may offer all cash but want you out quickly. Understanding your likely buyer type upfront helps you price the business correctly, market it to the right audience, and set realistic expectations for how the deal will come together.
Know Your Buyer Before You Go to Market
The sellers who get the best outcomes aren’t necessarily the ones with the best businesses. They’re the ones who go to market with a clear picture of who their buyer is, what that buyer cares about, and how to make the business as attractive as possible to that specific audience.
Indiana Equity Brokers has closed more than 879 Indiana transactions — which means we know what buyer types are active right now, in your industry, at your deal size. If you’re thinking about a sale in the next one to three years, a conversation about your likely buyer pool is one of the most useful first steps you can take.
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