The Differences Between Financial And Strategic Buyers

If you are thinking of selling your business, you need to know the different types of buyers you could face.  There are 2 primary buyer categories that you need to know about and they are financial and strategic.  It is also important to know about the differences between these types of buyers and why they are considered very different.

What Are Financial Buyers?
A financial buyer will generally be another company or organization that buys other businesses.  This will include private equity firms, hedge funds, family offices and venture capital firms and investment banks.  These buyers will be looking for businesses that they can make a return on their investment on within a 5 to 7-year period.  After this amount of time, the financial buyer will generally sell the business again.

What Are Strategic Buyers?
Strategic buyers will generally be your competitors, customers or suppliers who are looking to expand their own operations.  Their goal will be to look for companies that will enhance their own business and which can be incorporated into their existing operation.  There are times when strategic buyers are not related to your industry or company but are looking to diversify their revenue sources by going into a new industry.

The Evaluation Of Your Business
When you are looking at the differences between these buyers, you need to consider how they are evaluating your business.  The strategic buyer will be evaluating your business on the integrity capacity and the synergy with their current operations.  However, the financial buyer will be looking primarily at the revenue-generating capacity of the business.  They will also be looking at the capacity for revenue growth in the future.

The difference in the evaluation will relate to the other focus of these buyers.  The strategic buyer is looking to purchase a business that will easily fit into their current business and enhance it.  It is vital for them to look at acquisitions which tie in with their business units and their company as a while.

When evaluating your business, strategic buyers will ask certain questions such as details on the exact products you sold to your customers.  They will also ask whether your business serves customers in a different demographic to those that their company currently services.  They will also look at finding out more about the economics of scale that you have realized for your business.

Financial buyers are generally going to be evaluating your business as a stand-alone entity with no relation to the effect it can have on their current business other than additional revenue.  Financial buyers will generally ask about how quickly the business has grown and what the potential growth in the future will be.  Financial buyers will also look at whether you have any debt as they are more likely to buy a business in partial debt.

When looking at this, it is important to note that not all buyers can be neatly categories into strategic or financial.  There are some strategic buyers who are only looking to boost their earnings in the same way that a financial buyer is.  However, when you understand the motivation behind the purchase and what the buyer is looking for, you will have a better idea of how they are going to value your business.

How Long They Intend To Own The Business
Another major difference between these buyers is the length of time they are going to hold onto the business they are buying.  A strategic buyer is looking to hold onto the purchased company indefinitely because it is going to be incorporating into their existing business.  The full integration will be essential for them to get what they want from the business they are buying.

Financial buyers are very different as they will generally hold onto the purchased business for a set amount of time.  They will generally look at a period of ownership of 5 to 7 years.  This is due to the fact that they are not integrating the business into their own and are just looking at the revenue that could be generated.

It is important to know about this retention period because it will impact the price the buyer is willing and able to pay or the business.  The financial buyer will generally be looking to acquire a business for as little as possible to maximize the profit they make in their finite period of ownership.  The strategic buyer may be willing to pay more because they are looking at the long-term benefits that the acquired business can provide to their current operations.

The Strength Of The Back-Office Infrastructure
Another difference between these buyers is the importance they place on the strength of the back-office infrastructure.  The strategic buyer will be less focused on this as many of the back-office functions will be removed during the integration with their business.  Their business will already have these processes in place and it would be considered redundant to have both running.

The financial buyer will be different as they will not have these back-office functions in place.  This means that they will place more focus on a good back-office infrastructure as they need it to endure while they hold the business.  This means that they are more likely to scrutinize all of the back-office functions as part of their due diligence when they purchase a business.

When you know which buyer you are dealing with, you can place more or less emphasis on the back-office infrastructure when talking to them.  With a strategic buyer, you will be able to focus on other aspects of the business.  When talking to a financial buyer, you will need to be prepared for a thorough evaluation of all the back-office functions and infrastructures in place as well as questions about what could be done better.

It is important that you know the differences between financial and strategic buyers when selling a business.  Financial buyers will focus on different aspects of the business compared to strategic buyers and you need to know about this when you enter negotiations.  You also need to know how they will evaluate the business because this will impact the amount they are willing to pay.