Understanding the different types of buyers is critical for company owners and executives eager to enter into transactions to have their companies acquired. There is no one-size-fits-all, and simply selling to the highest bidder ignores a host of considerations and complications for all parties involved.
It’s instructive to first understand the core differences between two buyer types: strategic and financial.
What is a Strategic Buyer?
Strategic buyers are companies that might be competitors, suppliers, distributors, or customers of your firm. They are aware of your business and overall industry, because they are in it, too. The goal of strategic buyers is to purchase a company whose products or services synergistically integrate with their own, in order to generate incremental, long-term shareholder value.
Strategic buyers can also be companies outside of your industry or local area; however, they are looking to expand and grow their market in order to augment or diversify revenue sources.
What is a Financial Buyer?
On the other hand, financial buyers are not operating companies looking to sync products, services, or markets. Financial buyers are private equity firms (also known as “financial sponsors”), venture capital firms, hedge funds, family offices, and high-net-worth individuals. These firms and executives are in the business of making investments in companies, and seek acquisition targets for the sole purpose of realizing a return on their investments.
Key Differences Between Strategic Buyers and Financial Buyers
Because these buyers have fundamentally different goals, the way they will approach your business in an M&A transaction can differ in significant ways.
There are two primary ways they differ:
1. Business Valuation
One of the most significant differences between strategic and financial acquirers is how they evaluate a business. Strategic buyers focus heavily on synergies, operations, and integration capabilities, while financial buyers typically only concern themselves with the business’s ability to generate cash and its capacity for earnings growth.
Since strategic buyers are often incorporating the acquired business into a larger business, it is critical for them to consider acquisitions based on how the targets will fit with their existing company and business units.
On the other hand, financial buyers generally evaluate an opportunity as a stand-alone investment opportunity, since the acquired company will not be integrated into another existing company. The target company will most likely be one of several companies within the financial buyer’s portfolio, so in some way, the acquired company must conform to certain risk profiles consistent with the financial buyer’s strategy. Nonetheless, a financial buyer focuses primarily on the business’s ability to grow very quickly in the shortest amount of time, in order for there to be a liquidity event, during which the target company will be sold or go public.
However, it’s important to note that neither is strictly one or the other. A strategic buyer isn’t always simply seeking synergies; the buyer could also very well be looking at financials simply in order to boost its own company’s revenues and profits. Similarly, a financial buyer may already own a company in the target company’s industry or market, and is looking to boost performance in a portfolio. It’s important for the management of a target company to fully understand the motivations of an acquiring company to determine if there is the right fit.
2. Investment Horizon
Another key difference between strategic and financial acquirers is how long they intend to own the acquired company. Strategic buyers might plan to keep the business indefinitely, often fully integrating the company into their existing business. Financial buyers, however, typically have an investment time horizon of a few years.
Timing can depend on several factors, including the appetite for dealmaking, the interest rate environment, political factors, and other macroeconomic factors that can affect a deal.
This distinction in timelines impacts how much a buyer is willing to pay for a business, and the terms and rates offered by bankers and investors participating in the transaction. The way in which each type of buyer measures ROI affects valuation and deal pricing.
How Companies Can Make Themselves Attractive to Buyers
Companies interested in making themselves attractive to buyers should of course continue to strive for operational excellence and focus on strengthening their financials. Without the need to make intentions of a sale public, target companies can work with their investment banking and legal advisors to let it be known that the company’s management will consider proposals from buyers, whether they are strategic, financial, or a combination of the two.
Target companies should also have the right tools and resources at the ready so that due diligence and dealmaking are not hindered should a potential buyer appear. A virtual data room (VDR) is the solution to host important documents in the cloud in order to assure speedy due diligence while maintaining the highest levels of privacy and security. With rights management, permissioning, tracking, and other advanced features, transactions could be delayed without the use of a VDR.
Organizations should consider an enterprise document security solution like Caplinked, which has years of experience working with corporate, financial, and legal teams and providing VDRs for transactions and ventures of all sizes.
Jake Wengroff writes about technology and financial services. A former technology reporter for CBS Radio, Jake covers such topics as security, mobility, e-commerce, and IoT.
Corporate Finance Institute – Strategic vs Financial Buyer