The Pros and Cons of Different Types of Buyers
We explore two different types of buyers – “Strategic buyers” and “Financial buyers”, and which type of buyer is right for you and your business.
Strategic buyers
Strategic buyers are organisations that are looking to expand their operations vertically (up or down the supply chain), horizontally (into new territories or product categories), or increase their market share (i.e. buying a direct competitor). Their main objective is to buy a business, which can help to improve their own through synergistic benefits or addressing weaknesses.
Strategic buyers will often pay more for a company than a financial one. This is because they are paying for these synergistic benefits, in addition to what the business is delivering today. They are also more likely to pay a premium if there is sufficient competitive tension in the process, so that the target does not get into the hands of the competition!
Strategic buyers are less likely to want to retain all the key personnel in the company as they will be able to make cost savings through eliminating duplicate roles, and so often these types of buyers are good option if you are looking to exit in the short term with the primary objective of achieving the highest possible price.
Financial buyers
Financial buyers are interested in making investments with a view to realising a future return. By and large, most financial buyers will have an investment horizon in the region of three to seven years and will look for businesses that either display characteristics such as strong cash generation, capable management teams and growth potential.
As financial buyers are seeking to make a return on their investment, they will focus heavily on the cash flows of the business and the future exit opportunities (i.e. a future sale or an IPO). Although they might well identify future opportunities for growth, they are less likely to pay for this potential as this will be considered upside to them.
Unlike strategic buyers, financial buyers are much more likely to demand that key personnel in the business remain in place; they will be needed to drive the growth of the business during the term of investment. Therefore, if you are looking to take some cash of the table but have ‘gas left in the tank’ for a few more years, a financial buyer may be better suited to you than a strategic one.
What type of buyer is ‘right’ for me?
The ‘right’ buyer for your business will depend on your objectives for the exercise (check out the first blog in our series for more about this). Whilst on paper, both types of buyer are profoundly different, in some cases they may behave differently to what you would typically expect e.g. a financial buyer which already owns a company similar to yours may act more like a strategic buyer if they are exploring bolt-on opportunities.
It is therefore not always a case of identifying the ‘right type of buyer’, but rather the ‘right buyer’, which is why we heavily recommend bespoke research to identify the very best buyers for your business.
If you are thinking about selling your business and would like a call to discuss how Velocity can help, please call us on 0203 924 5150, or email us at info@blueboxvelocity.com.
For our full guide to selling your business, click here.