Key Differences Between Buyers Interested in Purchasing Your Business
Most successful sales relationships depend on a seller understanding their buyers — their objectives, desires, concerns, and more. If you’re considering selling your business now or in the future, it’s worth taking time to understand your potential buyers. By understanding their motivations and goals, you can better negotiate and achieve a more favorable outcome.
Essentially, there are two types of buyers, strategic and financial, each with very different objectives.
Strategic buyers are often your competitors, suppliers, or customers. They are looking to integrate your products or services with their own to increase shareholder value. Of course, these buyers might be unrelated to your company, in which case, they are looking to diversify by growing in your market.
Financial buyers invest in companies to realize a return on their investments within five to seven years, usually through a sale or an IPO. These buyers include private equity firms, venture capital firms, hedge funds, family offices, and high-net-worth individuals.
These two types of buyers differ in four fundamental ways:
An important difference between strategic and financial buyers is how they evaluate your business.
1. Strategic buyers will focus primarily on synergies between your companies and opportunities for integration.
2. Financial buyers will examine cash-generating capabilities and opportunities to grow earnings.
Because strategic buyers want to incorporate your business into their larger business, they want to understand how they can integrate your products or services.
Strategic buyers might want to know if:
– Their customers buy your products.
– Your business serves a different customer segment.
– They can realize economies of scale.
– You’ve developed intellectual property they might want to own or prevent a competitor from acquiring.
On the other hand, financial buyers will generally evaluate your business on its own merits. They will focus on your business’s ability to grow quickly. Additionally, they will probably finance the acquisition with some percentage of debt, so they will want to understand your business’ capacity for generating cash flow so they can service that debt.
Another key difference between strategic and financial buyers is their investment horizon — how long they intend to own your business. Because strategic buyers plan to integrate your company into theirs, they will keep your business indefinitely. This contrasts with financial buyers, who typically have an investment horizon of five to seven years.
The differences in investment horizon between these two buyer groups are significant because they will impact how much each is willing and able to pay for a business. Financial buyers are more sensitive to business cycle risk than strategic buyers.
Because the timing of the acquisition and sale of a business, especially in the context of the overall business cycle, will impact a financial buyer’s return, this buyer will consider various exit strategies for your business before deciding to acquire it. Consider a financial buyer who purchases a company at the height of a business cycle for 5X EBITDA and can only sell it for 3X EBITDA after five years. That buyer will be hard-pressed to make an attractive return.
Strategic and financial buyers will view your industry differently. Because strategic buyers are usually in your general industry, they will look to see how your business can integrate with their overall corporate strategy. Strategic buyers often want an acquisition that will improve their bottom line.
In contrast, financial buyers look at the whole picture, your business, and your industry. Because financial buyers are often not committed to any single industry, they will consider both the attractiveness of your business and your greater industry. Financial buyers often seek guidance from consulting firms to help with this evaluation.
If your industry is highly regulated, variable, or discretionary, seeking a strategic buyer can help reduce any industry risks that might concern a financial buyer.
Strategic buyers tend to focus less on the capabilities of your company’s existing administrative infrastructure. These functions might include IT, HR, Payables, Legal, etc. because many of these will be eliminated when the buyer integrates your business.
Financial buyers will need this back-end infrastructure to run the business, so they will scrutinize it during the due diligence process and will often seek to strengthen it after the acquisition.
As the seller, you should de-emphasize the value of your back office when talking with a strategic buyer. Be prepared for a thorough evaluation of these functions when talking with a financial buyer.
Please contact us for a confidential discussion of your specific situation. We have experience helping business owners across various industries sell their businesses, as well as relationships with buyers interested in new opportunities.