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For business owners who are selling a company for the first time, there’s a lot they don’t know about the deal process. Among the many considerations they’ll need to make is what type of buyer to go after. That decision hinges largely on what the seller ultimately wants to accomplish through the transaction, and what they want to happen to their business when they are gone, says Gen Cap America’s Lamar Stanley.

“You have to begin with the end in mind,” says Stanley, who sources deals for the Nashville-based private equity firm.

Smart Business Dealmakers talked with Stanley about how buyers make this critical decision.

How do owners determine which type of buyer or investor to pursue?

You have to begin with the end in mind. The owner needs to have a pretty clear expectation about what they're looking to get from this — what their number is and what their goals are, financially, in the transaction.

Also, what do they want their lifestyle look like? We talk to a fair number of business owners that haven't thought too deeply about that. That will help them choose the right buyer and investment bank or intermediary that can help them identify the right fits.

In the case of Gen Cap, all of our deals tend to take on the look of a management buyout. We tend to be a really good fit for the owner that wants to retire immediately or at least soon, or at least step back considerably in the business, and then we back their internal management team and we stick with them.

So we tend to be a good fit for the owner that wants to see their management team taken care of. We give them a sweetheart deal in equity and then they get to run the business going forward and largely the business stays the same.

Now if the owner wants to stick around and continue to ride the rocket ship to the moon — let's say it's a really quick-growing business and they just need help scaling — then they might go investigate private equity firms through an intermediary that is a little bit more involved from an operational perspective day-to-day.

In some cases, if the owner doesn't really care what the business is going to look like after and wants to retire, you might look at strategic buyers that could just swallow up the business and add it to their existing service offering.

What difference does the type of buyer make to how an owner prepares their business for a transaction?

There are a couple ways. One, the emphasis on management. A lot of private equity firms are going to be pretty focused on what kind of management team is left in the event that the owner wants to step back or how long the owner going to stick around after.

A strategic might be a little less concerned about that because the plan might be just to take the service offering or the product line that they're buying and just roll it into their own management team, so management and back office systems aren't really as critical to them.

From a cash flow standpoint, there might be some capital expenditures that a strategic might be a little less concerned about just because they might have some infrastructure to absorb that in future years, whereas a private equity firm will be pretty focused on that assuming they don't already have a platform company in the industry. They will want to see that they're not going to have to pay that again in the near term.

Generally speaking, I think those apply across strategic and private equity, but it can vary wildly and even within those buckets.

How can sellers learn to see their business as investors and buyers see it from the outside?

First, you need to get a pretty firm grasp of your own profitability and that's why we always recommend to people that they go get a sell-side quality of earnings done. And while we recommend it for the founder-owned company that might not have been audited every year, it's frankly good for even institutionally back companies just to figure out where all the holes are and make sure there are no surprises in the event of a process.

So get a quality of earnings done or at least an audit done by a reputable CPA firm. The CPA firm will help you, coach you, on the soft patches that you might not see in your business. But in addition to that you at least know what you have in terms of profitability and then you can start to get to the true profitability for a buyer by looking at the things in the company that might not be associated with company — these are what we would typically call the ad backs during a process. There might be club memberships. There might be vehicles. There might be tickets. There might be certain family members that are on payroll. All those things that could be added back until you can get a pretty good feel for your profitability and how the market will perceive it.

While it might not be rocket science, it just helps. We all need coaches just to see the things that we've gone blind too. So if you've been in the company for over a decade, let's call it, there are probably things that you just don't even see any more the outside counsel might help you see.