Successful companies are usually highly sought after by both strategic buyers (corporations) seeking acquisitions and financial buyers (private equity firms) seeking investment vehicles. Understanding the similarities and differences between these two types of buyers can be of great value to a seller.
Strategic and financial buyers both purchase equity in successful companies, but that is where the similarities end. Upon careful consideration, the differences between strategic and financial buyers are both many and fundamental.
First and foremost, financial buyers commit to two transactions when they undertake an investment, i.e. a purchase of the business followed by an intended later sale. Financial buyers make money by purchasing and then improving, or growing the business, followed by a second sale transaction.
Conversely, a strategic buyer executes only a purchase transaction, followed by integration of the business into its existing operations. So, a strategic buyer makes money by realizing synergies, rather than a second sale transaction, in sharp contrast to a financial buyer.
Accordingly, the corporate qualities or characteristics that are of value to a financial buyer are very different from the characteristics of value to a strategic buyer.
Continuity of a proven management team is of prime importance to a financial buyer since they need to continue to build the business on a stand-alone basis. Conversely, strategic buyers usually have a deep management bench and they need to integrate the acquired business, so continuity of the current team is not an important consideration for them.
The most important quality to a strategic buyer is the strategic fit of the acquired business with their existing business, since they realize value from integrating or combining the acquired business with their current operations.
Financial buyers rely on revenue growth, debt reduction, productivity increases, or other forms of financial improvements to realize returns so their valuation methodology typically is based solely on a discounted future cash flow analysis.
Strategic buyers realize financial returns from synergies, in addition to the future cash flows from the company on a stand-alone basis, so strategic buyers can afford to pay a higher valuation for the business, although they must be compelled to do so.
Synergies are unique to each strategic buyer, so understanding what synergies are possible, the value of each synergy to a strategic buyer, and how to motivate the strategic buyer to pay as large a portion of their synergies as possible to the seller in order to win the purchase, can result in significant added value to the seller.
Government regulatory anti-trust approval (HartScott-Rodino) is always a concern for strategic buyers but it is never a concern for financial buyers since they invest in the company on a stand-alone basis.
Finally, while financial buyers may accept a minority investment in the business, strategic buyers require a control position in order to effect integration and realize synergies.
Understanding the fundamental differences between financial and strategic buyers, combined with effective marketing of a business for sale, can translate into more transaction options and significantly higher valuations to the seller of a business.
For more information, contact our team of industry experts at Impact Capital Group