Strategic vs. Financial Buyers

Potential purchasers of your company generally fall into two general categories known as strategic buyers and financial buyers. The best fit will depend on your goals for the company and yourself and your timeline for closing a deal. Bridgepoint financial services recommends business owners to explore the potential deals with both types of buyers, you should understand the differences in their focus and deal process.

Strategic Buyers

A strategic buyer may be better if you want to leave the business entirely or do not have a strong management team in place. These buyers are typically in the same or a similar industry and may be your competitors, suppliers, customers or distributors. Because they already understand the industry’s competitive landscape and current trends, they will spend less time researching and analyzing the attractiveness of the industry overall compared to a financial buyer. They will focus instead on synergies after the acquisition.

The goal is to identify companies whose products or services synergistically integrate with their existing P/L to create incremental long-term shareholder value.”

Synergies typically take the form of reducing costs or increasing revenue. A strategic buyer may be able to eliminate redundancy in physical plant or property, equipment or personnel. Combined purchasing power may also reduce costs. 

Increased revenue may come from adding production capacity, breadth of product or ancillary services. Combining market share, entering a new market, and acquisition of intellectual property (or preventing it from being acquired by a competitor) may also create revenue synergies. 

Some owners fear a strategic buyer may synergize their company out of existence. While a strategic buyer likely won’t gut the company and destroy what you’ve built, they will leverage your knowledge, products, resources and services to accelerate growth of the combined entity.

When it comes to deal making, the strategic buyer’s buy-and-hold strategy and quest for synergies mean valuations will be tied to a multiple of earnings, often based upon trailing 12 months EBITDA

Valuations may also be influenced by industry, the company’s margins and profitability, and financial performance cycles and trends. 

In addition to paying a higher valuation than a financial buyer, a strategic buyer may have adequate cash to close the deal. Closing the deal may take longer than a financial buyer, however, as a strategic buyer is operating an existing business, may need board approval, and may not have acquisition experience.

Because a strategic buyer may be a competitor, sellers should require a tight nondisclosure agreement (NDA) and a timeline for sharing highly sensitive information.

Financial Buyers

A financial buyer may be better if you want to maintain a role in the company for a few years after the sale or want to move quickly to close a deal. Financial buyers include private equity firms, venture capital firms or institutional investors, hedge funds, family investment offices and ultra high net worth individuals. Because their expertise is buying businesses with future growth potential and making return on investment, financial buyers generally move more quickly during a transaction than strategic buyers.

A financial buyer may not be familiar with your industry and so may hire an outside consulting firm to help analyze potential returns. There may be a higher risk of sale process falling through because they find industry itself unattractive. They will evaluate your company as a stand-alone entity, not a piece to integrate into a larger enterprise.

A financial buyer will have an exit plan in mind when making purchases, typically four to seven years after the acquisition, because the timing of that exit will impact their return on invested capital. That said, a financial buyer is not looking to drain a company of capital; their incentives are aligned with future performance of the company.

“Most financial buyers have a specific time horizon for their investment and do not intend to own and operate the target business indefinitely.”

When evaluating the investment, financial buyers will require detailed accounting information and will scrutinize hard assets to secure loans and free cash flows to service debt, their primary means for capitalizing the deal. They will look closely at the existing management team, as will be needed to operate the business after the sale. Because they do not expect synergies from the acquisition to increase value, they will typically have lower multiples on valuations and lower purchase price than strategic buyers.

Before you begin discussions with prospective buyers, understand your objectives for selling, it’s imperative to search for the best investment banking firm.  Bridgepoint Investment Banking can help you clarify your goals for the company and yourself and set appropriate expectations for the deal process with all types of potential buyers. Your conversations with us are always confidential. Call today to speak with one of our investment bankers about the future of your company.

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