The Strategic Buyer vs. Financial Buyer: How Do They Differ?


“The best buyer isn’t always the one with the highest price—it’s the highest price from the best buyer and how they will align with your goals and objectives.”

When marketing your company to potential acquirers there should always be a discussion as to what type of buyer is the best fit for your company. Buyers fall into two major categories: strategic and financial. Let’s look at the differences between these two types and how each might view and value your business.

Strategic Buyers
“Expanding capabilities or ‘buying vs. building’ product offerings are benefits desired by strategic buyers.”

Strategic buyers understand your business and industry. They could be a competitor or a company from a similar or related line of business. This type of buyer is on the hunt for companies to realize the following 5 benefits:

1. Growth
The bigger a business grows the more valuable it becomes. Strategic acquirers are primarily interested in growing top-line revenue and, most importantly, EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization). This is because larger EBITDA companies command higher multiples when they are eventually sold, compared to smaller EBITDA companies in the same market.

2. New products and technologies
Expanding capabilities or “buying vs. building” product offerings are benefits desired by strategic buyers. For example, an acquirer company that provides metal stamping services to the aerospace industry would benefit from being able to offer its customers other services such as precision CNC machining or other related services through acquisition.

3. Geographic expansion
Companies that would like to expand their geographic footprint often find it more cost-effective to purchase an existing business rather than opening a new geographic area from scratch. Many times, local sales personnel are already in place and customers come online immediately.

4. Synergistic advantages
A subset of strategic buyers is a synergistic buyer. Quite often, but not always, a strategic buyer can also take advantage of many synergies after the purchase of a new company. For example, a strategic buyer who is larger and has excellent supplier pricing can acquire a competitor and apply their pricing against the competitor’s higher rates to generate higher gross margins. Additionally, G&A expenses such as accounting, marketing, travel, HR, shipping, advertising, and sales can be centralized, allowing the combined entity to run at a lower cost structure than each company individually.

TIP: If you’re selling to a strategic/synergistic buyer, you will want to capitalize on the synergistic “financial benefits” that the buyer is going to realize after a sale. This can be tricky but experienced M&A advisors can create a scenario that benefits the seller who understands these synergies.

Financial Buyers
“The good news for sellers is financial buyers know what they are doing, the bad news is, financial buyers, know what they are doing.”

If you are not comfortable with the idea of selling to a competitor or prefer to keep an equity stake in your company post-sale, then a financial buyer is probably the best fit. Financial buyers come in many different varieties, including:

    • Private equity groups (PEG)
    • Family office
    • Venture capital (VC) firms
    • And even high net worth individuals

The one thing financial buyers all have in common is they typically invest in solid companies with strong management teams. They do not want to come in and manage the company. These buyers want to invest capital, bring some synergies or strategic benefits, grow through additional acquisitions, and eventually sell a much larger company for a much higher multiple. The time horizon for exiting an acquisition for most financial buyers is 5-7 years, possibly longer for family offices. Here are 5 keystone features Financial Buyer look for:

1. Platform Investment or Add-on
if your company is large enough (typically $2M+ EBITDA) a financial buyer may look at you as a “platform” investment—essentially investing through acquisition in a new industry or market space as a starting point for follow-on acquisitions in the same area. At the time the PEG acquires the platform, they do not have an existing compatible company to combine it with that would yield synergies.

Platform companies stand in contrast to “add-on” or “tuck-in” acquisitions, where synergies to an existing portfolio company exist. When a financial buyer purchases an add-on, they typically do not have a minimum revenue or EBITDA requirement.

2. Minimal changes after the closing
If it’s a platform investment, financial buyers look to keep the management team in place and make little to no changes. What they want is for the company to continue operating and performing as it did in the past. As an add-on, they may decide to relocate the company or change the management structure somewhat, but mostly they want to keep changes to a minimum.

3. Strong M&A capability
Getting an LOI signed and deal closed with a financial buyer is business as usual for them. Remember these are professional buyers, they make dozens, or hundreds, of acquisitions and have a very well-oiled process. The good news for sellers is financial buyers know what they are doing, the bad news is, financial buyers, know what they are doing. The due diligence is very thorough—they hire the best accounting and legal firms and look under every rock, which is why having an expert M&A advisor on your team is necessary.

4. Retaining equity post close
Providing meaningful retained equity stake in the company post-closing is something financial buyers do very well. They can structure a sale to include an attractive equity appreciation opportunity combined with a cash-out portion so you can take some chips off the table. Eventually, when you sell your retained equity position down the road, you may realize a significant profit if the company has done well. Like any investment, your equity position is risky, but that is why you can take most of your money out at the close.

5. Highly Selective
Financial buyers are very selective for two reasons. One, they need to provide significant returns for their investors, and two, they typically get financing, so they don’t have to use all their cash. For these reasons, here are some baseline criteria that they look for:

  • Recurring revenues
  • Low customer concentration
  • The strong management team in place
  • Good market growth opportunities
  • 15% or greater EBITDA margins
  • Low CAPEX
  • Strong competitive advantage

Both strategic and financial buyers offer advantages and disadvantages. A good M&A advisory firm will advise their client as to the merits and challenges of both types of buyers based upon the business owner’s unique goals. The best buyer isn’t always the one with the highest price—it’s the highest price from the best buyer and how they will align with your goals and objectives. Finally, a good M&A firm will always put strategic and financial buyers in competition with one another to get the best possible outcome and maximum value for the business owner.

Steven Pappas




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