7 Reasons Why Strategic Buyers Are Better Than Financial Buyers
If you are thinking of selling your business, you may wonder whether you should look for a strategic buyer or a financial buyer. Both types of buyers have their pros and cons, but in this article, we will explain why strategic buyers are usually better for your business and your wallet.
Key Takeaways
A strategic buyer is a company that acquires another business that complements or augments its own, resulting in cost savings or additional income.
A financial buyer is an investor that acquires a business to earn a return on investment, usually in another exit event several years after acquisition.
Strategic buyers are usually better than financial buyers for sellers because they can pay more, close faster, offer more flexibility, preserve the legacy of the business, provide more support and resources, create more value for stakeholders, and reduce risk and uncertainty.
To sell your business to a strategic buyer, you need to identify potential candidates, prepare a compelling value proposition, negotiate the best deal terms, and transition your business smoothly.
What is a Strategic Buyer?
A strategic buyer is a company that acquires another business that complements or augments its own, resulting in cost savings or additional income. For example, a strategic buyer may be an existing competitor, customer, distributor, or another participant in the marketplace looking to expand its business. A strategic buyer may also be a company from a different industry that sees an opportunity to enter a new market or leverage a new technology.
What is a Financial Buyer?
A financial buyer is an investor that acquires a business to earn a return on investment, usually in another exit event several years after acquisition. For example, a financial buyer may be a private equity firm, a venture capital firm, or an individual investor. A financial buyer is typically interested in the cash flow and growth potential of the business, rather than its strategic fit with its own operations.
Why Strategic Buyers Are Better Than Financial Buyers
Here are some reasons why strategic buyers are usually better than financial buyers for sellers:
1. Strategic buyers can pay more
Because strategic buyers can realize synergies from the acquisition, such as increased revenues, reduced costs, or improved market share, they can afford to pay more for the business than financial buyers. According to a study by Bain & Company, strategic buyers paid an average of 40% more than financial buyers for similar businesses between 2010 and 2019.
2. Strategic buyers can close faster
Because strategic buyers are more familiar with the industry and the target business, they can conduct due diligence faster and more efficiently than financial buyers. They also have fewer financing constraints and less regulatory hurdles than financial buyers, who often rely on debt or outside investors to fund the deal.
3. Strategic buyers can offer more flexibility
Because strategic buyers have a long-term vision for the business, they can offer more flexibility to the sellers in terms of deal structure and terms. For example, they may be willing to accept seller financing, earn-outs, or equity rollovers, which can help the sellers defer taxes and participate in the future upside of the business.
4. Strategic buyers can preserve the legacy of the business
Because strategic buyers value the brand, culture, and reputation of the business, they are more likely to preserve its legacy and identity than financial buyers. They may also retain more of the existing employees, customers, and suppliers than financial buyers, who may seek to cut costs or make changes to improve profitability.
5. Strategic buyers can provide more support and resources
Because strategic buyers have more experience and expertise in the industry and the market, they can provide more support and resources to the acquired business than financial buyers. They may also offer access to new customers, markets, technologies, or partnerships that can help the business grow and thrive.
6. Strategic buyers can create more value for stakeholders
Because strategic buyers can create synergies from the acquisition, they can create more value for all stakeholders involved in the deal than financial buyers. For example, they may increase customer satisfaction, employee engagement, social impact, or environmental sustainability.
7. Strategic buyers can reduce risk and uncertainty
Because strategic buyers have a clear strategy and vision for the business, they can reduce risk and uncertainty for the sellers than financial buyers. They may also have more alignment of interests and values with the sellers than financial buyers, who may have different goals and expectations.
Tips
- Start preparing early. The sooner you start preparing your business for sale, the more attractive and valuable it will be to potential strategic buyers. You should focus on improving your financial performance, streamlining your operations, strengthening your competitive advantage, and resolving any legal or regulatory issues.
- Hire a professional intermediary. A professional intermediary can help you find and contact qualified strategic buyers, market your business effectively, negotiate the best deal terms, and facilitate the closing process. They can also act as a buffer between you and the buyer and protect your confidentiality and interests.
- Be realistic and flexible. While strategic buyers can pay more than financial buyers, they may not pay as much as you expect or want. You should be realistic about the value of your business and the market conditions and be flexible in terms of deal structure and terms. You should also be open to different types of strategic buyers, such as domestic or foreign, public or private, or large or small.
Strategic vs Financial Buyer: A Statistical Report
The question of strategic vs financial buyer often arises when a company is being sold, as in mergers and acquisitions (M&A) or leveraged buyouts (LBOs). A strategic buyer is typically after horizontal or vertical expansions, looking for strategic synergies that will improve their operations. A financial buyer is interested in making an investment in a company and realizing considerable returns from it. This report will compare and contrast the two types of buyers and analyze the global demand trends in this industry.
Strategic Buyer Explained
A strategic buyer is interested in how the acquired firm aligns with his long-term business plans. There can be different reasons for acquiring a new company, such as for vertical integration (geared toward clientele or suppliers), horizontal expansion (exploring new markets or product lines), getting rid of competitors, or helping to eliminate or overcome market weaknesses of the acquiring company. Often, strategic buyers are willing to pay more for companies than financial buyers. One reason is that a strategic buyer is better placed to realize synergistic benefits almost instantly. This is because of the economies of scale that may arise from integrated operations. The more the acquired business fits into the existing company’s structure, the more a strategic buyer will want the business and the higher the premium he will be willing to pay. Secondly, strategic buyers are usually large and well-established companies with easier access to capital. As a result, they may possess a different currency, in the form of stock. In fact, a strategic buyer can pay for the acquisition by purchasing stock, paying cash, paying stock or through some combination of purchase methods.
Financial Buyer Explained
A financial buyer views an acquisition as an investment. They are looking to invest up to a certain amount of money in acquiring the target company, and then expect that investment to generate a satisfactory return. The financial buyer is open to investing in different kinds of businesses and industries rather than only those that align with his existing operations. A financial buyer looks to increase his revenues and cash flow through different techniques, including venturing into revenue-generating projects, reducing expenses, and creating economies of scale. Once the financial buyer reaps maximum returns from his initial investment, he is likely to exit the company, either by taking it public or selling it outright.
Global Demand Trends
According to a report by PwC, the global M&A activity reached $3.6 trillion in 2022, surpassing the previous record of $3.4 trillion in 2015. The report attributes this growth to several factors, such as low interest rates, abundant liquidity, strong corporate earnings, high valuations, and increased confidence in the post-pandemic recovery. The report also notes that strategic buyers accounted for 83% of the deal value in 2022, while financial buyers accounted for 17%. This indicates that strategic buyers are more active and dominant in the M&A market than financial buyers. The report forecasts that the M&A activity will remain robust in 2023, driven by continued economic recovery, digital transformation, sector consolidation, and cross-border deals.
Strategic buyers and financial buyers have different motivations and approaches when acquiring a company. Strategic buyers are looking for synergies that will enhance their existing operations, while financial buyers are looking for returns that will justify their investment. The global demand for M&A deals is high and expected to remain so in 2023, with strategic buyers leading the way.
Frequently Asked Questions
Q1: How do I find a strategic buyer for my business?
A: To find a strategic buyer for your business, you need to identify potential candidates that have a strong strategic fit with your business. You can use various sources of information, such as industry reports, trade publications, online databases, networking events, or referrals from advisors or peers. You can also hire a professional intermediary, such as a business broker or an investment banker, to help you find and contact qualified strategic buyers.
Q2: How do I negotiate with a strategic buyer?
A: To negotiate with a strategic buyer, you need to prepare a compelling value proposition that highlights how your business can benefit them strategically and financially. You also need to conduct thorough research on their background, motivations, goals, and preferences. You should aim to build trust and rapport with them throughout the process and address any concerns or objections they may have. You should also seek professional advice from legal, tax, and financial experts to ensure that you get the best deal possible.
Q3: How do I transition my business to a strategic buyer?
A: To transition your business to a strategic buyer, you need to plan ahead and communicate clearly with all parties involved in the deal. You should also prepare a detailed transition plan that outlines the roles and responsibilities, timelines, milestones, and deliverables for the post-closing period. You should also provide adequate training and support to the new owners and managers and ensure a smooth handover of the business operations and assets.
References:
http://www.mckinsey.com/insights/organization/preparing_your_organization_for_growth
https://www.amazon.com/dp/B01MCYIQJ5
https://corporatefinanceinstitute.com/resources/valuation/strategic-buyer-vs-financial-buyer/
https://theygotacquired.com/resources/strategic-vs-financial-buyer/
https://blog.acquire.com/strategic-buyer-vs-financial-buyer-whats-the-difference/
https://www.bain.com/insights/ma-report-2020/
https://corporatefinanceinstitute.com/resources/valuation/strategic-buyer-vs-financial-buyer/
https://www.investopedia.com/terms/f/financial-buyer.asp
Essential Topics You Should Be Familiar With:
