5 Key Differences Between Strategic and Financial Buyers
Strategic Buyers: These are often individuals or companies that operate as competitors, customers or suppliers to your business or within the larger marketplace. Their goal is to strategically integrate your business into theirs to achieve their goals, among them: increased scale, growth, efficiency, or to adopt proprietary or unique processes or technologies you may employ.
Financial Buyers: These could be anyone from high net-worth individuals to hedge funds, and their ultimate goal is just as their name states: they’re in it for the money. They seek to identify unrealized value within companies, buy said companies, and sell them for a profit, typically within 5-10yrs. Aside from a given businesses potential for profit, or for the growth of the market they operate in, financial buyers are almost singularly focused on the numbers.
Even though financial and strategic buyers are approaching an acquisition from very different perspectives, they tend to look at many of the same things.
Length of Investment
- Strategic Buyers: Generally speaking, these buyers are in it for the long haul, more often than naught, looking to incorporate your business into theirs until they’re indistinguishable. For them, the timeline is a question of how quickly that integration can be achieved, how costly it might be, and how long it will take for the various benefits to become apparent.
- Financial Buyers: These buyers will likely have a robust market assessment with predictions well into the future, and as such they will likely have multiple exit strategies ready to be deployed based on how the market behaves. Almost all financial buyers are looking to exit the business in the end, and their ability to make a profit on this exit is their driving decider.
Approach to the Industry
- Strategic Buyers: Since they’re already likely operating within the same industry/market as your business, strategic buyers often take a very micro approach to assessing how the acquisition might provide value. They’re familiar with the landscape, they want to see how your company specifically can integrate into theirs, and the value generated from such a pairing.
- Financial Buyers: Unlike strategic buyers, financial buyers often look to more macro trends. They’re like a home buyer who lives out of town, but wants to get a sense of where the up-and-coming neighborhoods are going to be in 5-10 years. They’re trying to get a sense of long-tail industry potential, and whether or not they can get a piece of an upswing by buying and effectively flipping your business within a relatively short time frame.
Strength of in-house infrastructure
- Strategic Buyers: Often general back-of-office departments like HR, legal or IT will be phased out or pared down in a strategic acquisition since the existing company would already have their own. However, creative or technology/engineering departments can often drive the sale of strategic buys if this is where the purchasing company feels they are lacking.
- Financial Buyers: These buyers tend to operate at a slight distance, and their ability to constantly focus on new investment opportunities across industries rests on the ability for their current acquisitions to run smoothly day to day.
Evaluation of the Business
- Strategic Buyers: Often they will approach your business from the perspective of how it ‘fits’ into their current operation. They’re looking for whether your company will provide them with increased market-share, production efficiency, or sales funnels that they do not currently have. They’re assessing immediate compatibility as well as long-term benefits.
- Financial Buyers: They are much more focused on the business as a stand-alone entity, and as such the old adage “cash is kind” comes to mind. They’re looking to see how much debt the company has, how much cash they have on hand, and how much those two numbers might increase or decrease – respectively – in the future.
Efficiency of Transaction
- Strategic Buyers: Often these buyers are the slower of the two when it comes to making an acquisition. They are likely assessing other companies in the field, and the decision to acquire will undoubtedly have long term impacts on the parent organization for years to come. They are looking to make a long-term business decision, and this is not taken lightly, or come quickly.
- Financial Buyers: These buyers are in the business of making acquisitions, and as such the speed and efficiency with which they can make them is a large part of their profit strategy. Generally speaking, they tend to move quickly, so being prepared and having a competent website brokerage in your employ can mean the difference between a smooth, profitable sale, and nothing.