Before You Sell: The Pros and Cons of a Financial Buyer

When selling your business, you may receive a range of offers from prospective buyers. As you have initial conversations with buyers, you may find that they have different goals for the sale. 

Broadly speaking, a buyer can be lumped into one of two categories — financial buyer or strategic buyer. Most buyers in the lower middle market (those with revenues between $5 million and $25 million) tend to be financial buyers. These buyers are particularly mindful of the return on their investment and are weighing purchasing your business against other possible investments of their time and money. 

Read on to get an in-depth look at what financial buyers are and what you, as a business owner, can expect when dealing with them during the sales process

What Is a Financial Buyer? 

A financial buyer is someone who’s largely concerned about their return on investment. Examples of financial buyers include: 

  • High net-worth individuals 
  • Private equity firms 
  • Hedge funds 
  • Venture capital firms 

This type of buyer is concerned about how the purchase of a target company fits into their investment portfolio, and they’re likely comparing how the potential acquired business compares to other investment opportunities. 

Private equity groups tend to be the “gold standard” when it comes to financial buyers. Private equity firms have what’s known as an “investment thesis.” An investment thesis outlines the criteria they follow for making a decision about whether to buy a certain business. They rarely deviate from their criteria, as their strategy includes growing the business and then having their own exit after a certain hold period (thus getting their desired return on investment).

Individuals and groups of individuals who purchase businesses basically follow a similar model as private equity

Mergers and acquisitions (M&A) in the lower middle market are typically performed by financial buyers. But this may not always be the case. It’s important to understand the difference between financial and strategic buyers so you know what to expect during the M&A process.

How Does a Financial Buyer Compare to a Strategic Buyer? 

Close-up of a handshake

There are a few key differences between financial buyers and strategic buyers that are worth highlighting. Sellers need to understand how buyers think, and knowing what type of buyer you’re dealing with is the first step.

Financial buyers are much more interested in the return they can receive from a business. As such, they’ll focus more on business valuations, cash flows, financial statements, and cost savings

To a financial buyer, your company may be considered a “portfolio company,” meaning you’re one of a few companies the investment group holds. They’re primarily focused on returns, which they can drive via: 

  • Revenue enhancement
  • Creating economies of scale by acquiring other companies 
  • Reducing expenses 

Unlike financial buyers, strategic buyers are more concerned about how a company fits into their overall vision and long-term business plans. Strategic acquirers typically look for larger companies, which is why you don’t see as many of them in the lower middle market. Strategic buyers often purchase based on potential. They may see opportunities for: 

  • Vertical expansion 
  • Horizontal expansion 
  • Enhancing weaknesses 
  • Eliminating competition 

If you’re dealing with a strategic buyer, the purchase price may end up being higher. Again, strategic buyers are focused on the potential that an existing business has to offer once it has been integrated into their existing operations. For this reason they might be willing to pay a premium to acquire a business. 

Financial buyers are more concerned about the continued growth of the business as a standalone entity. They will then assess how enhanced performance of the business satisfies their investment goals and possibly their own exit plan. 

What Are the Advantages of Working With a Financial Buyer

Person talking to a financial buyer

Working with financial buyers can be advantageous to sellers. For one, the M&A process tends to move quickly. These investors have a clear idea of the type of business they’re looking for. If they are willing to purchase your company, it means they trust your financials and believe you’re a good fit for their portfolio. 

Additionally, working with a financial buyer could present the opportunity to stay on board with the company if that’s something you’re interested in. Some financial buyers are happy to keep the existing management team in place to run daily operations of the company, as long as their financial goals are being achieved.

However, this could also result in a conflict of interest in the future vision of the company, especially when the financial buyer is ready to sell. It’s important to ensure that your goals are aligned with the buyer’s if you plan to stay on board after selling.

What Are the Disadvantages of Working With a Financial Buyer? 

There are a few disadvantages to consider when working with a financial buyer. Since most mergers and acquisitions in the lower middle market are completed with financial buyers, you may not have much of a choice about who you sell to. Putting a trusted team of advisors in place can help you navigate the sales process and protect your interests. 

Perhaps one main drawback of working with financial buyers is that they’re going to be heavily focused on your financial statements. They’ll want to see that you have a strong history of being a healthy company. Your company will likely have to be well-established – with strong, stable cash flow – to catch a financial buyer‘s attention. 

Furthermore, the purchase price may be lower when working with a financial buyer than with a strategic buyer as the former will rely on financial models. Financial buyers purchase companies like yours often, so they have a good understanding of what your company is worth. Working with a trusted team of advisors for regular business valuations can help you avoid a valuation gap and future disappointment during the sales process. 

Lastly, if you’re concerned about the future growth of your business, there may be disadvantages to working with a financial buyer. Even when purchasing your company, a financial buyer may already be thinking about an exit strategy and ways to receive maximum return on investment. Some of your hopes and visions for the company could be lost when dealing with a financial buyer. Ultimately, it will depend on how hands-on or hands-off the buyer wants to be, in addition to their operations expertise. 

Trust Your Team of Advisors During the Sales Process 

If you’re going through the M&A process for the first time, there’s a lot to consider. You may encounter different types of buyers. They’ll want to perform due diligence on your company, but it’s important that you do the same in return. You want to make sure that whoever you’re selling to allows you to meet your goals as you exit your company. 

Be sure to have a trusted team of advisors in place. Your deal management team can conduct business valuations, go through the due diligence process for various potential buyers, and compare buyout offers when the time comes.

If you’re looking for a trusted team of advisors to help you through the M&A process, contact Allan Taylor & Company. With more than 15 years of experience in the industry, we can work with you to develop a successful exit plan from your company.

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