Strategic vs Financial buyers: Which one are you and what are the differences?

As you prepare for growth via acquisition strategy, you have likely created a case for the transactions through various approaches and developed a strategy for how to notice synergies. Something you may not have realized is what kind of buyer you are. Throughout this blog, we will discuss the differences between a strategic and financial buyer.

Strategic VS. Financial Buyers

Buyers typically fall into two categories: strategic and financial. Where your company falls depends on your approach to the transaction.

A Strategic Buyer Approach

Strategic buyers aim to buy a business in their industry that has a process, know-how, patents, workforce, or other appealing assets that can help the business grow. These processes could stem from the acquisition of new technology or the expansion of a product or service line. If you’re a strategic buyer, you should be aware of the ability to avoid redundancies that come from the transaction. These redundancies are primarily noticed in accounting but can also be identified within the company. The acquisition is undoubtedly an area that should be a priority

A strategic buyer is intrigued through a buying and holding strategy that identifies patterns between the existing company and the company they are going after. The better the “fit” between the buyer and seller, the bigger premium a buyer will be willing to pay to the seller. A financial buyer has the mindset of “buy low and sell high.” Strategic buyers want to purchase a business, drive efficiencies, and scale the entity. Financial buyers generally won’t be too concerned with synergies unless the acquisition is an add-on for an existing portfolio company.

Also, a large strategic buyer may have access to more considerable funds. The strategic buyer also has the benefit of being able to issue stock as part of the transaction. This allows the strategic buyer to offer various forms of payment for the business. It also gives the strategic acquirer an ability to be flexible when discussing the deal structure that a financial buyer does not have. A financial buyer is generally limited to the funds raised from investors. Also, to funding limitations, the financial buyer focuses on producing an ROI. The emphasis on returns means that financial buyers need to be careful not to overpay a company.

The Financial Buyer Approach

The financial buyer is not one specific type of buyer. Instead, the category encompasses a wide variety of mostly institutional buyers. Some of the most common include:

  • Venture Capital firms
  • Private Equity firms
  • Family offices
  • Holding Companies

While each of the above groups is different in both structure and how they operate, they share a commonality in the type of seller they attract. A strategic buyer looks to purchase a company and take over the operation. On the other hand, the financial buyer is more comfortable with a partial ownership stake or acting as a short to a mid-term financial sponsor. Due to this, the financial buyer is more susceptible to gain sellers who are looking to leave partially or who want to leave the business from an ownership perspective.

The financial buyer’s approach with the personnel already in place may be a key factor for some sellers. Business owners who are worried about their employees may be reluctant to work with a strategic buyer, notably when the owner founded the business. A strategic buyer may be able to produce some new synergies by eliminating the redundancies. However, a financial buyer is likely to leave the majority, if not all, of the personnel in place. Financial buyers may take an advisory team role and move the day-to-day operations to the current team.

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