Selling your mid-market business will probably be the biggest financial transaction of your life. So, you need to know as much as possible about the transaction process and how to maximize your profit before you start planning your sale.
One of the key things to understand is the psychology of the buyers approaching you. That will determine quite a few factors during the negotiation process, and it’ll give you a leg up when you’re selling the business.
Primarily, this is going to force you to know the difference between strategic buyers and financial buyers. Those are the two main buying mindsets that present themselves during business acquisitions, and you’re certain to deal with one or the other eventually. So, which one is easier for you to work with? How do you approach the negotiation process with either of them?
Find out in this ultimate strategic vs. financial buyer comparison.
Strategic VS. Financial Buyer: Why Does it Matter?
As we said, the type of buyer you’re dealing with will likely affect several parts of the transaction. Why is that, though? Do you really need to change the way you approach the transaction to secure a sale with different buyers? Well, yes. You do.
Financial buyers and strategic buyers have different perspectives about the transaction. Financial buyers are looking for solid numbers and a safe investment. Strategic buyers are looking for something a bit more complicated, and they want evidence that the business will align with their end goals.
The way you present information can dramatically change the route your negotiations take if you don’t understand your buyer and adapt to meet their needs, you might not secure an otherwise perfect deal.
The Financial Buyer: Key Characteristics
The financial buyer is the high-roller investment specialist you probably think of when you dream of selling your business. They tend to come in the form of hedge fund firms, wealthy investors, venture capital firms, and private equity firms.
These business entities aren’t looking to take over the market or do anything complicated. They want to buy your business, let it continue to grow for a few years, and then sell it for a profit.
This means that they’re less interested in how the acquisition will help them perform in the market and more focused on proven growth. Essentially, they treat it like a stock market investment. They want the safest, most surefire investment possible from a financial perspective.
The Strategic Buyer: Key Characteristics
The strategic buyer is very different from the financial buyer. A strategic buyer will likely be associated with your competition. In some instances, they might want to purchase your business and integrate it into their existing structure with or without its original branding. They might also use your business as a way to elevate their shares or expand their own business opportunities.
In other situations, they might not be your competition at all. They could simply be another business looking to expand into your market, but rather than do it from scratch, they’d prefer to purchase your existing business and utilize its infrastructure to make the transition process a lot easier.
Because this buyer isn’t necessarily interested in selling your business off but instead wants something they can utilize in meaningful ways, there are a lot less obvious things that they’ll worry about; such as whether or not your business can be moved into their infrastructure seamlessly, whether or not your business will support their end goal of entering a market or boosting their own business’s capabilities in their current market, and various other things. Of course, the bottom line still counts.
This can be a more complicated seller to deal with because there’s a lot more to it than just ensuring a safe investment.
Strategic VS. Financial Buyer: Differences in the Transaction Process
The differences between the two mindsets don’t just affect whether or not the buyer will be interested; they also affect how the buyer will handle the transaction process. It’s your job to adapt to their expectations.
Now, we’ll go over the various active differences in engaging with strategic vs. financial buyer. If you understand the ways they differ, you’ll be able to secure sales with either buyer with little friction.
How They Approach the Evaluation:
When it comes to comparing strategic vs. financial buyers, one of the most important differences is the evaluation process.
The evaluation process is probably the most nerve-racking part of the whole transaction, and these two types of buyers will take totally different approaches to it. While they both ultimately want to make a profit in the end, they both have entirely different methods of bringing it to fruition.
Since a financial buyer is looking to offload the business in less than ten years at a considerable profit, they’re not worried about whether or not they can integrate it into a larger business entity. They look solely at how the business is performing, its opportunity to grow, and how fast that growth can be realized. It’s all about beefing up its value within 5-7 years to sell off quickly rather than actually acquiring a business they’ll pour time and effort into like you did. If you have the numbers backing you up, this can be a fairly easy process, and it shouldn’t be too difficult to secure a worthwhile deal.
However, the same cannot be said for strategic buyers. Keep in mind that they aren’t looking to sell your business. They’re typically trying to pull your business into the competition’s to raise the stock value, get you out of the way, expand their own business, or take the fast track into a new market you’ve been doing well in for years. This greatly complicates the evaluation process.
There are several things they’ll look at to evaluate your business’s ability to suit their needs:
- Are there existing manufacturing economies that will allow them to upscale production and boost profits?
- Do you have a patent, intellectual property, trade secret, or something else unique to your business that might be useful in their hands, or at the very least, kept away from their competition?
- Do you currently serve their customers? This removes competition while increasing their consumer base.
- Do you serve a different audience? If they’re looking to get into a new market, having an established consumer base they don’t have access to is valuable to them.
These are the core traits that bring value to a strategic buyer. In all likelihood, if the buyer is remotely related to your industry, you probably meet some of these requirements.
However, these guidelines aren’t always accurate. Sometimes, a strategic buyer will make a more financially focused move, a financial buyer might throw a curveball at you and aim to really make long-term use of your business. While it’s typically easy to tell their motives by finding out who they are, their motives should be a talking point early on to see if there are any oddities in their approach that you may need to adapt to.
Considering the Business Cycle: Investment Horizons
This one is pretty clear-cut. A strategic buyer isn’t looking to sell your business 99% of the time. It’s not that type of investment for them. They’re looking to acquire, and indefinitely hold, your business as a part of their own. Therefore, the business cycle, or the fluctuation in value over time, means very little to them. In fact, they might not even bother to consider it since they have no plans of making an exit any time soon.
On the other hand, it’s probably the most important factor for a financial buyer.
A financial buyer doesn’t want to hold onto your business any longer than they have to, and they certainly don’t want to buy high and sell low. This minimizes their profits and simply doesn’t match their goals.
Instead, they’ll pay close attention to the business cycle to determine if it’s the right time to buy in and whether or not their intended exit period lines up with the business cycle. If those things don’t align, they can easily walk away, and there is very little you can do about it. At the end of the day, a financial buyer is looking for a quick turnaround.
Your business, regardless of what it is, is attached to an industry. For the purpose of this example, let’s say you manufacture small kitchen appliances such as rice cookers and waffle irons. Financial buyers and strategic buyers are going to look at your business’s industrial investment merit.
Financial buyers are going to be focused more on how well the industry performs and if your business aligns with that performance. For example, are small kitchen appliances booming in the US? Are they starting to boom internationally? Will they continue to grow in sales over the next seven years? Those are the things that will ensure the buyer gets a large profit upon exiting the business.
For strategic buyers, it’s more important that your business can integrate with their own. Are you selling a hot proprietary kitchen appliance they can’t replicate until they buy your business –and the rights associated with the design-? Do you have a large consumer base they don’t have access to yet? How easily will your business’s infrastructure combine with their own?
Rather than focus on how well the market is performing, which they already know since they’re in it, strategic buyers are trying to see if your business will help them realize their business’s full potential in the industry.
Again, this is one of those things that one type of buyer cares heavily about and the other couldn’t care less.
First, let’s discuss what your business’s back-end is. Your back-end consists of things such as your legal team, IT specialists, HR staff, and other team members that aren’t directly involved with production but do have a major impact on the day-to-day operations under the hood.
Strategic buyers usually don’t care about any of this. They have a company in the industry with all of those back-end roles filled. Unfortunately, this means they’ll likely be getting rid of your back-end staff and replacing them with their own. On the plus side, it means you don’t need to have a strong back-end to make a deal.
In comparison, financial buyers want you to have a strong back-end infrastructure. Remember, they’re not trying to pull your business into something larger. They’re trying to spend as little as possible on it, help it grow, and sell it for a profit. To do that, they can’t afford to build their own back-end infrastructure. However, they need that infrastructure to facilitate growth. If you have that back-end infrastructure in place, they don’t have to invest in building a new team, and they still get the necessary resources to grow the business for profit.
Not having a strong back-end infrastructure can greatly damage your deal with a financial buyer; where strategic buyers usually don’t care.
Putting This into Action
Hopefully, after this strategic vs. financial buyer comparison, you understand the key differences that set these buyers apart, so you can begin putting that knowledge into action.
When buyers begin to approach you, take some time to identify what type of buyer they are, and customize your approach to suit them.
For example, if you get a strategic buyer who is interested in your business, don’t focus on back-end infrastructure they don’t care about. They’ll want to know about it, but they’ll be much more interested in how easily your business can blend into their existing model. If you’re dealing with a financial buyer, don’t focus as much on your industry’s investment merit as you do the business cycle. Of course, investment merit is a key factor in acquiring an asset, but in the beginning, they’re going to want to assess the cycle and see if it aligns with their timeline appropriately. Thus, the cycle takes priority.
Finally, you really don’t have to worry about all of that too much. Well, you don’t if you get a little help from expertized M&A advisors.
At Final Ascent, we specialize in facilitating the sale of mid-market businesses. We can guide you through all of the processes outlined here, and we can help with the rest of the transaction, too. Not only that, but we also stick around after the transaction to help with post-sale obligations and transitioning.
If you’re planning on selling your business, or you’re currently struggling to do so on your own, contact Final Ascent for a partner who can make your life’s largest earning event a breeze.