Types of Financial Buyers

There are two types of buyers: strategic buyers and financial buyers. Commercial lenders, family offices, private equity funds, mezzanine funds, independent investors, and other capital providers are all financial buyers. Strategic buyers include everything else. It can be beneficial to entertain both financial and strategic buyers when you are selling your business. Still, it is important to understand how financial buyers think and what you’re dealing with as you work through conversations and negotiations.

Financial buyers are typically much more interested in the return that they can receive from acquiring a business. They will look closely at your company to see where they can generate cash flow by increasing revenue, acquiring additional similar companies, and cutting costs. They will also focus on exit strategies down the road, such as a sale. They are under pressure to hit target returns on the money that they are investing, which can inhibit their ability to present high valuations. Hitting their target returns makes a difference in future management fees, whether or not they will be able to raise future funds and the amount of carrying received upon exit.

Another point to understand about financial buyers is that they don’t usually benefit from synergies such as cost reduction, combined talent or cross-market revenue growth. They are not gaining the benefit of two companies performing stronger together than they do on their own. As a result, without these benefits, it puts a ceiling on what they are able to offer in their initial proposal.

That being said, there are several reasons why it remains a valid point to include financial buyers in your sale process. Financial buyers will almost always help to keep your process disciplined and moving at a good pace. While a strategic buyer can be very new to the process, continues to need additional information, are unable to make quick decisions, etc., the financial buyer tends to be more experienced, having worked through many deals already. They will know how to proceed through the NDA process, review relevant information and how to structure an LOI. They typically have a proven process for effectively moving through each step of the due diligence process as well. Financial buyers can help keep strategic buyers on track during the process. Because the selling process tends to move faster with financial buyers, it increases your probability of closing a deal.

Financial buyers are not interested in running day-to-day operations and as such, are usually more favorable for sellers who plan to continue to work in the business after closing. They may take a seat on the Board of Directors and help guide growth plans, but they are investing in the current management team and will usually need sellers to stay on post-close for a minimum of 2 to 3 years. Many times, the seller will retain a percentage of ownership to provide motivation for them to continue to grow the company. A financial buyer tends to own the acquired business for 3-7 years before seeking an exit to realize their return. Financial buyers have a specific timeline for exiting their investment and may develop strategies that will align managements earnout and/or financial rewards with the financial gains and success of the exit in mind.

Due Diligence is different between Strategic and Financial buyers. Financial buyers will almost always be heavily focused on the financial matters that require detailed accounting information in order for them to best understand the financial picture of the business and build out their models of projected profits. Strategic buyers will focus on financial matters as well, but will also work to understand how the business can be integrated into their existing structure seamlessly, increase market share, bring in employees and technology or diversify revenue streams. Because financial buyers do not have the same level of industry knowledge as strategic buyers, they may bring in outside consultants and third parties to perform part of the due diligence.

Understanding the approaches that are taken by financial buyers can be important for a seller to keep in mind when working towards their goals for a transaction. This will help the selling business owner to have realistic expectations for the various stages of the sale process and will, in the end, aid with making the decision on the right partner to meet the original objectives of the sale.

  Author
  Amy Alonso
  Transaction Director
  Benchmark International

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