Financial and Strategic Buyers

If you decide to sell your business to an outside acquirer, you’re going to have to decide between a financial and a strategic buyer.  Understanding the different motivations of these two buyers can be the key to getting a good price for your business.  So let’s talk about the main differences between financial and strategic buyers.

Financial Buyer

A financial buyer is acquiring your future profit stream, so they will evaluate your business based on how much profit it is likely to make and how reliable that profit stream is likely to be. The more profit you can convince them your company will produce, the more they will pay for your business.

But there is a limit to how much they will pay, because financial buyers are playing the buy-low, sell-high game. They do not have a strategic rationale for buying your business. Financial buyers don’t have an army of sales reps to sell your product or a network of retailers where your product could be merchandised.  Often, they are simply trying to get a return on their investors’ money.  So they tend to buy small and mid-sized businesses using a combination of this investment layered on top of a pile of debt, and they want to buy your business as cheaply as possible with the hope of flipping it five or ten years down the road.

Because financial buyers are usually investors and not operators, they want you and your team to stick around, so they rarely buy all of a business. Instead, they buy a chunk and ask you to hold on to a tranche of equity to keep you committed.

Strategic Buyers

A strategic buyer is a different cat!  This buyer is usually a larger company in your industry, that is evaluating your business based on what it is worth in their hands. They will try and estimate how much of their product or service they can sell if they added you into the mix. Because of their size, this can often lead to buyers who are willing and able to pay much more for your business.

What’s the Difference?

Tom Franceski and his two partners had built DocStar up to 45 employees when they decided to shop the business to some Private Equity (PE) investors. The PE guys offered four to six times Earnings Before Interest Taxes Depreciation and Amortization (EBITDA), which Franceski deemed low for a fast-growing software company.

Franceski was then approached by a strategic acquirer called Epicor, which is a global software business with a lot of customers who could use what DocStar had built. Epicor offered DocStar around two times revenue—a much fatter multiple than the PE firms were offering.

In this example, understanding the differences between financial and strategic buyers was a very important consideration for Tom.  Had he just gone with the financial buyer, he would have made less money on the sale of his business.

Each business situation is unique and requires careful consideration.  Talk to a professional before you make that decision to sell.  Thoroughly understand the various variables involved in the sale of your business so you can get the best price for you.