HOW THE EXPECTED PAYOUT FROM DIFFERENT BUYER TYPES INFLUENCES A PRIVATE SELLER’S HARVEST STRATEGY

Abstract

ABSTRACT Demographic forces in the U.S. economy can be expected to have a significant impact on the behavior of small business owners, particularly as it relates to their ownership transitions and exiting from their privately held firms (the development of “harvest” strategies). The ability of business owners to identify entity value and communicate this to the market (market signaling) could be a key determinant in maximizing sellers’ payouts at the dispositions of their businesses. Historically, payouts have been maximized through transactions with strategic buyers, who have pre-existing knowledge of the seller’s industry or market thereby permitting rapid value accretion for buyers. However, a current unprecedented level of capital available in the private equity market has created a sea of financial buyers who, despite having available capital, may not have the industry or firm specific knowledge which permits the rapid value accretion in an acquisition as it would a strategic buyer. In turn, seller payouts may be suppressed because of selling to financial buyers. The primary focus of this paper is to explore how sellers view the differences between the two types of buyers and the implications for seller payouts. More broadly, it addresses the importance of market signaling and its impact on seller payouts.