Financial Vs Strategic Buyers: A Business Seller’s Primer

The terms “strategic buyer” and “financial buyer” undoubtedly will come up as you begin discussing the sale of your business with your accountant, attorney or merger and acquisition advisor (an investment banker or business broker). Your understanding will help you chart the best course for selling your business.

What is a financial buyer? Quite simply, a this type of buyer is an investor. It is in the business of buying other businesses. These buyers will evaluate the purchase of your business quite like you would evaluate the purchase of the stock on the stock market. They are not in your industry so they are simply looking for a return on their investment. In essence, financial buyers are interested in cash flow and historic growth.

Because these buyers are investors, they typically look for companies that are well-managed and have seasoned management teams in place. These buyers will scrutinize your financial statements very carefully looking for consistent earnings and, preferably, earnings growth.

What is a strategic buyer? These buyers are not simply investors. Instead, they are companies that are already in your business or a similar business. Their goal is to recognize business synergies from the businesses they acquire.

The sought after business synergies differ among this type of buyer. They include:

Increasing revenues

Increasing market share

Expanding into new geographic markets

Protecting or enhancing a supply chain

Diversifying the customer base

Realizing economies of scale

Is one type of buyer better than the other? This is a classic case of one size does not fit all. Below are some of the things you should take into account when deciding with which type of buyer you prefer to negotiate.

Price. A strategic buyer will generally pay more for a business because it sees value in the business synergies of combining its business with the acquired business.

Evaluation of Your Business. A strategic buyer will evaluate how your business fits in with its existing business. The financial buyer will evaluate your business from a purely financial perspective with the main focus being on historical financial results.

The Learning Curve. A strategic buyer is in your industry or related industry. Consequently, it can quickly determine if your business is an attractive acquisition candidate. On the contrary, a financial buyer has no experience in your industry. It will do extensive research and analyses to determine if it finds your industry attractive. This research and analyses can take quite a bit of time.

Due Diligence. Because a strategic buyer already understands your industry, it’s diligence process will be quicker. This type of buyer already knows the players in your industry, your customers, your suppliers and how your back-office infrastructure should work.

Time to Closing – Strategic Buyers. A strategic buyer’s knowledge of your industry helps it decide rather quickly if your business is one it wants to purchase and has the cash or the banking relationships to close quickly. Financial buyers are starting with no knowledge of your industry and typically borrow to buy businesses which takes time.

Time to Closing – Financial Buyers. Financial buyers are experienced at buying businesses and have seasoned M&A teams dedicated to getting your “deal” done without being encumbered with a strategic buyer’s day-to-day duties of running its own business.

Retention of Management Team. Because of financial buyer is an investor with no experience in your industry, it is highly likely that it will keep your management team and other employees and will not close any of your facilities. Strategic buyers, on the other hand, are well-versed in your industry and may have management personnel who can replace your management team and may have facilities that can replace your facilities.

Conclusion. Your merger & acquisition advisor will most likely bring you Letters of Intent from both types of buyers. It is in your best interest to sit down with your merger & acquisition advisor and evaluate each of those Letters of Intent. As you do, review each with the points made above in mind. This will go a long way in helping you select the best buyer for your business.

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