For business owners and CEOs looking to sell a business:
Should you sell to a strategic buyer or a financial buyer?
Every business and situation is unique, and exceptions and nuances apply.. but the following generally holds:
First off, let’s define the two types of buyers.
Financial buyers (also called Sponsors) for mature businesses are typically private equity , who are interested in buying the Seller’s business with a very definite “buy-grow-sell” plan in mind.
They typically apply leverage (debt) on the business, aggressively focus on growing revenue and margins, pay down debt, and then sell the business in 4-6 years.
Strategic buyers are generally interested in buying the business for different reasons.
They typically want to add a new capability to their existing offerings, vertically or horizontally integrate the Seller’s business into their business model and generate synergies.
BENEFITS AND DRAWBACKS OF SELLING TO FINANCIAL BUYERS:
(+) Since Financial buyers evaluate several dozens of deals a year and close several, they have a more efficient process and move quickly
(-) Financial buyers typically don’t have a lot of synergies (unless they have other companies in their portfolio that can be easily integrated). Therefore, the value they can pay is typically lower than a Strategic.
(+ or -) Since Sponsors use debt, they favor businesses with strong cash flows, and lower capital needs, which may or may not be the right fit for the Seller’s business
(+ or -) Financial buyers may sometimes bring in a new operator to run the business, but are often amenable to structuring the deal to retain existing management continue post close
BENEFITS AND DRAWBACKS OF SELLING TO STRATEGIC BUYERS:
(+) Strategic buyers typically know the space very well and have internal industry experts. They generally also understand the Seller’s business better.
(+) As a result, they also tend to pay more since they plan to realize deal synergies
(-) In my experience, they sometimes move more slowly since they have to build internal consensus and assess the fit of the Seller’s business within their organization before committing to the deal (** Exceptions could include serial acquirers doing several deals a year, that have an efficient process that moves quickly)
… SO WHAT IS THE RIGHT APPROACH TO TAKE THE BUSINESS TO MARKET?
Most Sellers will benefit from approaching a broader set of potential buyers – including BOTH Strategics and Financials.
This introduces competition and increases the odds of having more suitors who are willing to put in a bid.
Interested Financial buyers could establish a “floor” or minimum valuation range and provide a legitimate backup option.
… while Strategic buyers could provide greater valuation upside.
It’s important to form a view ahead of time if the buyer is more likely to be Strategic or Financial.
And as the Seller, understand your own preferences for whom to sell to, and where to focus the most effort.
Targeting the right buyer mix can make a big difference not only in the valuation but also the certainty to close.