If you are contemplating your exit strategy, you might be wondering who you should sell your company to. In M&A transactions, there are generally two types of buyers: strategic and financial. Knowing the difference between financial and strategic buyers before you embark on the sale process can help you obtain the most value for your company. Here we explain those differences and discuss other factors to consider when searching for a buyer.

What is a strategic buyer?

A strategic buyer is either a privately held or publicly traded company that is seeking to grow via acquisition. Strategic buyers generally seek acquisitions in the same (or a closely related) industry that provide synergies in the form of cost savings and/or increased incremental revenue. Strategic buyers generally seek to invest in companies that will allow them to:

• Diversify their product or service offering
• Grow their customer base
• Expand their geographic footprint
• Improve operational efficiency
• Enhance their R&D capabilities
• Add talented employees

In other words, strategic buyers make acquisitions with the expectation that the combined companies will result in a financial benefit greater than the sum of their individual parts. As such, they are sometimes willing to pay a premium for the right company.

What is a financial buyer?

In middle-market M&A, a financial buyer is typically a private equity (PE) firm. A PE firm will typically invest in a company with the goal of building its value and eventually reselling it to provide a return to investors. Because financial buyers are primarily focused on generating a return, their transactions are often highly leveraged. Unlike strategic buyers, who often pay a premium for the expected synergistic benefits of an acquisition, financial buyers are focused primarily on the company’s future expected earnings based on past financial performance. Read this detailed article on private equity firms > PE firms often seek to acquire a partial stake in a company and partner with its existing shareholders by providing financial resources and management support to lead growth initiatives or to make the company more “lean”. Most PE firms plan to spend a total of 4-7 years managing and growing their portfolio companies before exiting, which may involve selling the company to a strategic buyer, selling to another PE firm, or taking it public (an IPO). PE firms typically view an investment as either a platform or add-on acquisition. PE firms generally make platform acquisitions when starting a new fund or entering a new market or industry, and therefore don’t focus on synergistic benefits. Rather, they take a “buy low, sell high” approach, focusing on value and growth potential. In add-on acquisitions, however, PE firms take a more strategic approach, creating economies of scale by acquiring similar companies, which ultimately increases the value of their portfolio.

Things to Consider

The question of whether to sell to a strategic or financial buyer primarily depends on your goals as the seller. It will also depend on the quality of the offers you receive. Here are some factors to consider as you evaluate potential buyers.

Purchase Price, Deal Structure, and Terms

In an ideal M&A sale process, you would generate serious interest from multiple parties who would submit competitive offers for your company. If you receive multiple offers, your first inclination might be to accept the highest offer. Purchase price is important—after all, you want to ensure the after-tax proceeds on the sale of your company is enough to fund your retirement goals—but the structure and terms of your deal are equally important. For example, different deal structures (i.e. an asset sale versus a stock sale) can have significantly different tax implications. A buyer’s offer may seem higher than another’s, but may include less cash at closing and a risky earnout provision. Given how complex M&A transactions can be and the serious financial implications involved, it’s important to have a trusted attorney and experienced M&A advisor at your side to help evaluate offers and assist in negotiations.

Taking Some Chips off the Table

Most business owners have the majority of their net worth tied up in their companies. As you get older, having so much of your wealth tied up in your business can be risky. If you want to diversify your net worth but aren’t ready to retire, you may consider a selling a partial stake in your company. As we discussed above, financial buyers often seek to acquire partial stakes in companies. This type of transaction is typically referred to as a “recapitalization”. A recapitalization can allow you to stay actively involved in growing your company while extracting some of your personal wealth. After several years, if your company has increased in value, you will have the opportunity to sell your remaining interest. This may result in you receiving a higher overall price than if you had originally sold 100% of your company.

Employees, Culture, and Other Qualitative Factors

While the price, structure, and terms of a deal are extremely important when selling a business, some owners place equal importance on leaving a lasting, positive legacy. This often means finding a buyer who will retain your existing employees and offers the right cultural fit. If you are concerned whether a buyer will retain your employees, you should communicate your concerns during initial conversations. Often, strategic acquisitions create redundancies in certain company roles, which means some positions may be eliminated. In general, financial buyers are more likely to retain existing employees after an acquisition, especially key members of your management team and other people who play an integral role in the company’s operations. If you plan to sell a partial stake in your company to a financial buyer, it’s likely that you’ll be working together with them for an extended period of time as you continue growing the business. Therefore, it’s important to find a buyer whose management you trust and would enjoy working with. In doing so, you may find that the partnership offers a strong cultural fit. It’s also important to evaluate strategic buyers for cultural fit, especially if they plan on retaining your employees or if you plan to stay involved in the business. Sellers should make an effort to understand how the strategic buyer’s vision, goals, and values align with their own.

Parting Thoughts

Understanding how different types of buyers approach M&A transactions can be helpful in searching for prospective buyers and evaluating the offers you receive. But before you embark on the sale process, make sure to clearly outline your goals and expectations so that you can articulate what qualities you are looking for in a buyer. Additionally, make sure to request the help of your attorney and an experienced M&A advisor to help ensure a fair, successful transaction.

This document is for informational use only and may be outdated and/or no longer applicable. Nothing in this publication is intended to constitute legal, tax, or investment advice. There is no guarantee that any claims made will come to pass. The information contained herein has been obtained from sources believed to be reliable, but Mariner Capital Advisors does not warrant the accuracy of the information. Consult a financial, tax or legal professional for specific information related to your own situation.