Selling to a Financial vs Strategic Buyer
If you decide to sell your business to an outside acquirer, you must decide between a financial and a strategic buyer. These two buyers have quite different motivations. Understanding these differences is key to helping you get a good selling price for your business. Below we will discuss the differences between these two types of buyers. For additional questions, schedule a free consultation with Peak Business Valuation.
Financial Buyers
Who is a financial buyer?
A financial buyer views a business acquisition as an investment. As such they are often groups of investors. Common financial buyers include:
- Venture capital firms
- Private equity firms
- Holding companies
- Family offices
What is their strategy?
Buy-low, Sell-high
Financial buyers have a buy-low, sell-high mindset. Unlike strategic buyers, they do not have a rational or strategic reason for buying your business. Financial buyers simply look to get a healthy return on their investment. Because of this, there is a limit to how much they are willing to pay. They purchase a business, increase efficiency, scale the company, and eventually exit.
What are their reasons to buy the company?
A financial buyer is seeking a business that will provide them with a future revenue stream. Typically, they will evaluate your business based on the current cash flows and potential earnings growth. The higher the forecasted projections, the higher premium they will pay for your business.
How do they finance the business purchase?
Overall, a financial buyer looks to buy a business for the least amount possible with the hope of selling it for a higher price five to ten years down the road. Most financial buyers like private equity and venture capital firms are limited to funds raised from investors. Because they emphasize a return on their investment, they must be careful not to overpay for a company. As such, they often buy small and mid-sized businesses using debt to finance the acquisition.
What do operations and ownership look like?
Financial buyers are usually investors not operators. Because of this, they often look for a team that is fully operating and will continue with the business once transferred. As a business owner, if you are looking for a financial buyer, you will want to make sure your business is either self-operating or that you plan to remain with the business with less ownership.
If a financial buyer only buys partial ownership, they will ask the current management to remain a key part of the business. In this case, a financial buyer looks for a company with a strong management team. Keeping the current personnel in place is one of the key reasons and motivations for a business owner to choose a financial buyer over a strategic buyer.
Strategic Buyers
Who is a strategic buyer?
A strategic buyer, on the other hand, is usually a larger competitor in your industry. This type of buyer assesses the value of the business based on what they can do with it under their management.
What is their strategy?
Buy and Hold
Strategic buyers have a buy and hold strategy. They purchase a business, with the hopes of creating strategic synergies that will improve their operations. The better the fit of the company the higher premium a buyer will be willing to pay the seller.
What are their reasons to buy the company?
The strategic buyer seeks to identify synergies between the existing business and the target company. This can include processes, know-how, intellectual property, key personnel, or other appealing assets that will help the company grow. This type of buyer identifies a company that will help its current business be more cost-effective, efficient, and have greater opportunities in the marketplace.
A few of the strategic reasons for buying a business include the following:
- Expanding horizontally to new product or service lines
- Expanding vertically to new customers or suppliers
- Eliminating competition to gain more market share
- Acquiring new technology
- Obtaining key intellectual property that will
- Increase their value
- Enable them to produce better products
- Assist in producing more products
The strategic buyers seek to estimate how much added value the target company may have.
How do they finance the business purchase?
Larger strategic buyers often have more access to considerable funding and may issue stock as part of the transaction. This ability to diversify financing the business allows for flexibility when negotiating the deal structure. Because of the strategic buyer’s size and motivations, they are often willing to pay much more for your business than a financial buyer.
What do operations and ownership look like?
Because a strategic buyer looks to purchase a company and take over the operation, key personnel may or may not remain with the company. The strategic buyer often buys ownership for the entire business. As such, they can then choose what pieces of the company to continue and what to eliminate to meet their goals.
Summary
By understanding the motivations of a buyer, you can understand how they will determine your business value. This will ultimately lead to the purchase price they offer. A key step to a successful business transaction is understanding the differences between strategic and financial buyers. Additionally, how your business is impacted by both. Each has pros and cons, you as the seller must determine which is best for your goals and the company’s goals.
Peak Business Valuation is here to help. Whether you plan on selling your company or looking to acquire a company, we can answer any questions you have! Please reach out by scheduling a free consultation!
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