Financial and Strategic Buyers: How to Select the Right Type Buyer for Your Business

Recognizing the differences between financial and strategic buyers is crucial when preparing to sell your business. These buyer types each come with their unique advantages, drawbacks, and approach to acquisitions. Knowledge about their functioning can lead to more informed decisions and potentially better negotiation outcomes.

Financial Buyers

Financial buyers, such as private equity firms or family offices, are primarily driven by the potential return on investment. They tend to seek out businesses that are undervalued or exhibit significant growth potential due to certain factors such as industry trends or geographic location. While they might not possess specific industry expertise, they are known to provide financial backing and engage in restructuring initiatives to enhance the company's value.

The goal for financial buyers is to reap profits either through cash flow or by reselling the company. In general, financial buyers often have a more conservative sales price, are likely to retain senior management, commonly use debt in acquisitions, and have extensive deal-making expertise. Moreover, the sale to a financial buyer usually results in less business disruption.

Family offices, when compared to private equity firms, tend to hold on to their investments for a more extended period, which may factor into your decision-making. Regardless, selling to a financial buyer offers potential access to capital, management upside, and flexible deal terms. However, the downside could be additional debt, the requirement for the owner to stay involved, and extensive financial oversight.

Strategic Buyers

Strategic buyers focus on how acquisitions can synergize with their existing businesses. They believe in the concept where the combined value of their companies exceeds their separate worth, often due to aspects like new market access, product line expansion, increased talent pool, cost efficiencies, new capabilities, or a stronger brand reputation.

Strategic buyers are generally willing to pay more for a company than financial buyers, largely because of the anticipated synergies. Types of strategic buyers include suppliers, customers, competitors, and industries looking for strategic benefits. While selling to a strategic buyer might result in a higher company valuation and, possibly, a complete exit for the owner, it might also adversely impact company morale, personnel, and customer relations.

Making the Right Choice

Deciding between a financial and strategic buyer primarily hinges on your objectives. If your goal is to completely exit the business, selling to a financial buyer who would require your continued involvement may not be ideal. It's important to consider that strategic buyers may pay higher prices but may rely on their own senior management team. They may not have extensive deal-making expertise, and the sale usually results in more business disruption.

Understanding these key differences is crucial to making an informed choice when choosing between financial and strategic buyers. This knowledge allows you to better prepare your company for sale, tailor your expectations, and navigate negotiations effectively, thus maximizing your benefits from the transaction. I encourage you to meet with your wealth strategist and discuss your goals for selling so that you can target the right type of buyer from the outset.