The Difference Between a Financial Buyer and a Strategic Buyer
What Motivates an Acquisition?
Despite recent disruptions, M&A executives are ready to explore post-Covid Era dealmaking environments with a focus on acquisitions, divestitures, and alternative M&A strategies.
According to C-suite executives around the world, a driving factor of recent M&A activity has been in the ability to increase operational capabilities. New or additional capabilities can help organizations reshape their business model to adapt to changing market conditions and in some instances, entrepreneurs divest to streamline portfolios to better align with shifting priorities while sharpening focus.
Still, different types of buyers have different motivations – even when business fundamentals may be similar, such as a desire for sustained growth. However, variable timelines and different motivations can impact the deal in different ways.
When it comes time to sell your business, it’s more than essential to have a talented advisory team to help navigate this next stage of your journey. The emotional aspects of a deal can be overwhelming. After all, as an entrepreneur you’ve built a successful company and a successful company culture – moving past this is no small challenge.
Whether you’re a seasoned entrepreneur or selling for the first time be sure to,
- Have clearly defined priorities
- Have a defined communication strategy
- Have a strong advisory team to help overcome obstacles
- Have an understanding of what makes the right buyer and the right deal
Additionally, understanding the different motivations between a financial buyer and strategic buyer is an important step toward earning the highest multiples and ensuring your best exit.
What is a Financial Buyer?
Often, a financial buyer can see a path toward increasing growth quickly, by using opportunities to create efficiencies, increase economies of scale, or by investing in growth marketing. As investors, financial buyers often use acquisitions to quickly and significantly increase the overall value of their holdings and their goal(s) might include growing cash flow, reducing expenses and/or overhead through economies of scale.
Financial buyers are also able to form partnerships with minority stakeholders with greater flexibility – including the opportunity to learn about legacy operations. Financial buyers can be agnostic, often running a variety of companies across differing industries. Most often they are interested in acquiring a company for a period of time, building it up, and then flipping it.
What is a Strategic Buyer?
On the other hand, since a strategic buyer is usually already operating in the same industry, the acquisition represents the identification and absorption of a company with products, services, and culture that closely align with theirs.
Why do most sellers seek out a strategic buyer?
Strategic buyers will pay more than financial buyers because put simply, strategic buyers understand that your company is likely worth more, with the perceived value being much higher.
The acquisition most likely provides cross-selling opportunities immediately, but having similar cultures is important to having a successful integration long term.
Key Differences Between Financial & Strategic Buyer
Whether considering a sale of your business now or preparing for a future transaction, understanding the mindset of different types of buyers is critical to your preparation and decision-making processes. For businesses motivated to sell, but aren’t quite ready, Strategic Exit Advisors’ Readiness Roadmap helps to close any valuation gaps and improve the overall posture of your business to maximize deal value.
Again, while financial buyers look for returns out of the gate and an existing and functional path toward revenue, strategic buyers understand a deeper value in the acquisition of your business – capable of seeing higher future gains – and as a result will pay higher multiples.
The best buyer for your company will be contingent on your short-term and long-term goals and ultimately, with both your career and financial goals.
Want to learn more about how the M&A process can help your business? At Strategic Exit Advisors, we look forward to continuing to be your trusted partner.
Call us anytime (215) 489-8881 or schedule a conversation here.
