As a seller crafting your exit strategy, you’ll want to pay attention to the types of buyers interested in your business. The two main types of buyers for a business are financial buyers and strategic buyers.
In the lower middle market (those with revenues between $5 million and $25 million), you’re most likely to come across financial buyers. But that doesn’t mean strategic buyers don’t exist for your business. Depending on your goals for the sale, a strategic buyer could be enticing because the sale price may be higher. The acquiring company may also be able to offer advantages to both your employees and customers.
So, what is a strategic buyer? In this guide, you’ll get the answer to that question, plus learn how this type of buyer differs from a financial buyer, and the advantages and disadvantages of selling your business to a strategic buyer.
What Is a Strategic Buyer?
A strategic buyer is interested in acquiring a target company because of how they see it fitting into their long-term vision and growth plan. Strategic buyers will often purchase a company because of the potential they believe it has to offer. They may see opportunities for:
- Vertical expansion
- Horizontal expansion
- Enhancing weaknesses
- Eliminating competition
Because they’re purchasing based on both future potential and operational synergies between your business and theirs, strategic buyers may pay a higher price for a company than a financial buyer.
However, there’s a prevailing notion that when working with a strategic buyer, the purchase price is uber-inflated, almost as though a strategic acquisition is a unicorn not to be missed. The idea then is that a seller should immediately work with a strategic buyer if granted the opportunity because the final sale price will be exponentially higher.
Yet this is not necessarily the case. Strategic buyers may pay a premium that financial buyers are not willing to pay, but there’s no guarantee how much of a premium. Business owners are sometimes in for a letdown when they realize the offer isn’t as much as they were expecting.
This is one reason to have trusted advisors conduct regular business valuations so you have a better understanding of the market value of your company. This business valuation method simulates what a financial buyer would pay, so it acts as a good foundation for weighing any offer.
Another note about strategic buyers: They tend to target larger companies. The reality is that many businesses in the lower middle market are too small to get the attention of strategic buyers. As you explore mergers and acquisitions (M&A), it’s important to have a trusted team of advisors in place who can perform due diligence on your behalf and protect your best interests.
Because strategic acquirers often focus on larger companies, they themselves are often “big players.” This means that these buyers have a lot of resources – including a team of investment bankers – at their disposal, and deal structures can become sophisticated quickly. Hiring your own team of trusted advisors is the best way to ensure your goals are being met throughout the M&A process.
How Is a Strategic Buyer Different From a Financial Buyer?
We’ve answered the question, “What is a strategic buyer?” Now, let’s take a closer look at how a strategic buyer compares to a financial buyer.
While a strategic buyer is interested in the potential of an acquired company and how it supports their overall strategy, a financial buyer is primarily focused on an acquired business as an investment and the return they can receive from a business. Examples of financial buyers include:
- High net-worth individuals
- Private equity firms
- Hedge funds
- Venture capital firms
For a financial buyer, the decision-making process revolves heavily around a return on investment. These buyers are typically interested in how your company fits into their investment portfolio, especially when compared to other investment opportunities. As such, financial buyers may focus on the following:
- Business valuations
- Cash flows
- Cost savings
- Financial statements
- Tax returns
A financial buyer may see your business as a “portfolio company,” meaning you’re one of a few companies the investment group holds. The financial buyer sees opportunities to drive returns by reducing expenses, enhancing revenue, professionalizing operations or creating economies of scale by acquiring other companies (sometimes called a “roll up”).
As mentioned, strategic buyers are primarily focused on the vision or potential that an existing business offers, especially once integrated into its current operations. This is one of the key differences between strategic buyers and financial buyers.
For instance, if the deal is set up as an asset sale, the strategic buyer may be interested in purchasing your company for a unique asset or product line you have that they feel can help take their company to the next level. They may be willing to pay a premium to do so.
Financial buyers, on the other hand, are not so much interested in consolidation or changing a company’s operations. They may leave the acquired company as-is — as a standalone entity. They may even leave the existing management team in place.
That said, it’s not accurate to say that financial buyers aren’t concerned about the future potential of an acquisition target. They are, just in a different way. All buyers are concerned about daily operations, although less so if it’s just a straight-out private equity recapitalization.
If you’ve grown your business, are looking for a large payout, and are not too concerned about what happens to your company after you sell, then a strategic buyer could be right for you. On the other hand, if you want a hands-on role in the company after you sell it and would like the opportunity to potentially continue to grow the business, then you may be better suited for a financial buyer.
When working with a trusted team of advisors to help you throughout the M&A process, it’s important that you find a good cultural fit between your business and the strategic buyer’s. Deals often go south because companies were not a good cultural fit for one another, and integration between the two did not work out.
What Are the Advantages and Disadvantages of Working With a Strategic Buyer?
There are a few pros and cons to working with a strategic buyer. Perhaps the most obvious advantage is the potential sale price. Strategic buyers see your company — or portions of it — for the potential it has to offer and may be more willing to pay a premium to acquire your company.
The downside to this is that potential buyers may be less interested in what you, as the owner, have to bring to the table. Strategic buyers may absorb your company directly into theirs. You’ll have less say in operations. Your business structure may be dissolved because the strategic buyer is only interested in a couple of assets – like intellectual property, a product line, or customer list – that you have to offer. You may not have the opportunity to stay on board and continue working in a management role. Or if you do, you may not enjoy being an employee again.
An advantage that arises out of this, however, is that strategic buyers may be less concerned about the finances of your business. This is especially true when compared to financial buyers, who are looking at your company as an investment. If you have issues with cash flow, finding a strategic buyer could allow you to capitalize on the efforts you’ve put into growing the business.
Work to Find the Right Buyer for Your Company
After spending years growing your company, the M&A process can be daunting. It’s important that you consider things like “What is a financial buyer?” and “What is a strategic buyer?” before you engage in the sales process.
Going into the sales process with an understanding of what your business is worth and who’s interested in purchasing it will put you in a better position for success and increase the likelihood of satisfaction post-sale.
At Allan Taylor & Company, we have more than 15 years of experience helping companies like yours navigate mergers and acquisitions while looking after their best interests and long-term goals. Contact us today to learn more.