In addition to the types of advisors and capital structures, it’s also key to understand the types of potential buyers in M&A. There are two main categories of buyers: strategic and financial. These buyers are very different, each having its own pros and cons. At Crewe, we often advise our clients to consider both types and to cast a wide net at the beginning of the selling process, then whittle down from there. As a business owner, you’ve poured your time and your passion into your business, so it’s crucial to find the right buyer for you and your business.
Strategic vs. financial
A strategic buyer is often a larger company in the same or an adjacent industry that sees synergies with the business they are looking to buy. Most are looking to enhance their existing operations by acquiring a company that fits into their long-term plans. With a long-term and focused investment in your company, and an understanding of how the industry works, the interests of buyer and seller are easily aligned.
A financial buyer, or financial sponsor, is normally a private equity company, venture fund, merchant bank, family office, or other similar institution that is looking to achieve a return through acquiring a business. These buyers are typically looking for a much quicker return than strategic buyers so they can generate capital for their limited partners (LPs). They are professionals at acquiring companies and often work with experienced investment banks through a process, which can make for a smooth selling process. Often, financial sponsors will buy less than 100% of the business and typically finance the acquisition with a combination of debt, equity from a fund they have raised, or by partnering with another capital source. Since financial buyers don’t always have direct operating experience in the industry and typically aren’t acquiring 100% of the business, they often expect existing management to stay on for a period of time and to maintain an equity stake in the company.
Consider your goals
Deciding which buyer is the right fit can be a challenging process. As a seller, it is important to know what your goals are in the transaction, whether it’s maximizing value, finding a partner to help grow, protecting your employees, staying involved in your business, or something else. Knowing what you want from a transaction will help sort through potential buyers to find the right fit.
If you are looking to sell to the highest bidder, strategics will typically pay more because they can realize synergies after the acquisition by integrating their current operations and can often vertically integrate. Strategic buyers are often direct competitors to the businesses they acquire, so it’s important to consider the potential risks of sharing proprietary information that could affect your company during the process. If considering a strategic buyer, it is prudent to check their M&A track record to ensure they have had success with acquiring other companies. Financial buyers don’t typically pay as much as strategics, but rather prefer that sellers reinvest a portion of their proceeds alongside the new buyer. This provides an alignment of interests and an opportunity for the seller to participate in the future growth of the business after the transaction.
While the above comments are typically true, an experienced advisor is able to identify financial buyers that have invested in the sector and can pay as much as a strategic since they can realize some of the same synergies. Sometimes financial buyers can even pay more than a strategic if they are wanting to add a platform company to their portfolio and will pay a higher multiple to do so.
Platform or add-on?
Another important item to consider is whether your company would be considered a platform or an add-on. A platform is a business that is mature and large enough to make acquisitions. An add-on is a business that is acquired by an existing platform to help the platform grow and expand into additional products and markets. Since platforms are bigger and are often more sophisticated, they will sell for more than an add-on. Platform standards vary depending on the industry and buyer, so it’s best to discuss with an advisor if your company could be considered as a platform.
Strategic and financial buyers each have unique characteristics that may make one more attractive to the seller. Individuals considering a transaction should weigh all their options before making a decision. Sellers should verify that their advisor is capable of working with financial and strategic buyers. You can learn more about types of M&A advisors in our previous post. When considering what options are best for you and your business, it’s crucial to have a trusted advisor to guide you through the process. If you have any questions, feel free to reach out to the Crewe team.
