We often talk about strategic and financial buyers throughout the sale process, but rarely take the time to explore their differences. Many sellers have "preconceived apprehensions" about both axes of the buyer universe. We've heard both arguments: the financial buyers only care about earning their return, while the strategic buyers will lay off my employees and distort the brand I've worked tirelessly to build. Are the stories true and are the stereotypes justified? Not necessarily. The pendulum hinges on characteristics unique to YOUR company, YOUR goals, and YOUR vision for the future.
Assessing Strategic vs. Financial Buyers
Every seller is different, and the strategic vs. financial decision is unique to your company. A fundamental understanding of the buyer universe will help you evaluate your options with an informed perspective, ultimately allowing you to choose the correct partner during a sale. Let's flip the script and turn you into the undisputed winner.
Strategic buyers are prospective buyers that are in a business/industry similar to yours. They can also be in a business unrelated to yours, but looking to expand into your markets or want your intellectual property. They make good buyers because they can often bring synergies or integration opportunities to the table (2 + 2 = 5). They don't need two CFOs, for instance, or an extra HR person, or maybe they will sell that underutilized facility. The goal of the strategic buyer is to look for products or services that can quickly be absorbed into their own operation, which in turn increases the profitability of the target company. Because of the synergies strategic buyers can provide, both from revenue growth and cost cutting, they sometimes offer the highest valuations. So, will strategic buyers gut your company and change the culture you've cultivated for years? No, of course not. But, they will do everything in their power to leverage your knowledge, products, resources, and services to accelerate the growth of the combined entity moving forward.
Financial buyers are also known as private equity groups or PE buyers. These are groups of investment professionals that invest money or buy businesses, but often do not have any operational expertise in that business. Their job is to identify businesses with future growth potential and earn a return on their investments. Because they often finance the purchase of companies with debt, they pay a great deal of attention to the business' ability to generate cash flow.
Financial buyers will evaluate the strength of the management team because they are usually not bringing operational talent to the table. Financial buyers can generally move more quickly during a transaction than strategic buyers because executing transactions is their specialty. Unlike strategic buyers, they generally do not have cumbersome legal departments, Board of Directors, and layers of management approval delaying the completion of a deal. Financial buyers also have a "hold period" in mind for the companies that they purchase. In general, they resell their assets in 5 to 7 years. When it's all said and done, are financial partners using you to deepen their own pockets at all costs? No, in fact, their incentives are aligned with the future performance of the company. Selling to PE can be a lucrative endeavor for all parties involved, even you, well after the transaction.
Strategic Buyers Can be Better If:
- You want to leave the business entirely
- You do not have a strong management team in place
Financial Buyers Can be Better If:
- You want to maintain a role in the company for a couple of years
- You want to move quickly
“Which is the right choice?” is a question not easily answered without exploring the needs and desires of the business owner. Many times, it makes sense to include both types of buyers in the sale process. If you are a business owner contemplating a sale, you should fully understand the axes of the buyer universe. A talented, experienced investment banking team will introduce you to the right buyers capable of accommodating and executing your goals after the transaction. As a proud business owner, you deserve to be the undisputed transaction winner.