When contemplating an exit, it’s important also to contemplate the ideal buyer. Most buyers are either strategic or financial in orientation. Understanding the difference can help you define the best option, so you can get the highest possible value for your business.
What is a Strategic Buyer?
A strategic buyer seeks to grow a privately held or publicly traded company via acquisition. These buyers often want to buy businesses in similar fields, producing synergies such as cost savings or increased revenues. They often invest in companies that increase their capacity to:
- Improve services or products
- Grow their customer base
- Procure good employees
- Enhance research and development
- Expand their geographic reach
Strategic buyers hope that the financial benefits of an acquisition will be greater than the sum of the acquisition’s parts. They are often willing to pay a premium for the right business.
What is a Financial Buyer?
In the middle market, financial buyers are typically private equity firms seeking to invest in a company and get a return. They are focused on generating a high investment return, so they often seek low prices. They want to see the company grow and earn, and base their price offering on previous performance.
These firms sometimes seek a partial stake in a company, partnering with the business’s shareholders to provide financial resources and management support that grows the company or streamlines its operations. In most cases, an investor spends 4-7 years running the company in anticipation of an exit in the form of a sale to a strategic buyer, selling to another investor, or taking the firm public.
These firms usually adopt a “buy low, sell high” philosophy, focusing on growing the company’s value. In some add-on acquisitions, firms are more strategic, seeking to create economies of scale by acquiring several similar companies, boosting their portfolio’s value.
The right buyer depends on your goals as a seller, as well as the quality of the offers you receive. Some factors to consider when evaluating buyers and their offers include:
Deal Structure & Terms, Purchase Price
In the ideal transaction, you garner interest from several parties, each of whom submits a competitive offer. With multiple offers, you might want to accept the highest bid. Though purchase price is important, terms matter to. After all, taxes can affect how much money you actually get, and the terms of the deal can affect your future obligations. An offer that seems high might actually mean less cash at closing.
Taking Chips off the Table
If you’re like most owners and have significant net worth tied to your company, the risk increases as you age. If you want to diversify but don’t want to retire, consider selling a partial stake.
This can be an enticing option for some financial buyers This type of sale is often called a recapitalization. It allows you to remain involved, while still accessing cash. If your company’s value increases, you’ll be able to sell the remaining interest. This can produce a higher overall price than an immediate outright sale.
Culture, Staff, and Qualitative Factors
Many owners hope to leave a positive legacy. This may require finding a buyer who keeps your employees and continues your legacy. Cultural fit matters. Communicate your concerns during the transaction, and consider how strategic concerns may create redundancies.
If you plan to sell a portion of your business to a financial buyer, you will work with them for an extended period. You must trust their management, and enjoy working with them. You need a partnership with a strong cultural fit. Work to understand the buyer’s goals and vision, then assess whether they align with your own.
Understanding how different buyers evaluate transactions can help you evaluate their offers. Make sure you get advice from a lawyer and from an experienced M&A advisor to ensure the transaction is successful and fair.