Whether you are considering selling your business now or planning for a future sale, it is critical to understand the mindset of different buyer types, Strategic vs. Financial Buyers as you prepare and make decisions. By grasping the motivations and goals of each buyer type, you can better prioritize which buyers suit your situation and focus on the right relationships.
Potential buyers and investors generally fall into two main categories:
Strategic Buyers
Strategic buyers are operating companies that are often competitors, suppliers, or customers of your firm. They aim to find companies whose products or services can integrate synergistically with their existing business to create long-term incremental shareholder value. In other words, their primary reason for acquiring is strategic, thus the name. These buyers can also be unrelated to your company but looking to grow in your market to diversify revenue.
Financial Buyers
Financial buyers include private equity firms, venture capital firms, hedge funds, family offices, and high-net-worth individuals. These firms and executives invest in companies and aim to realize a return on investment within 5-7 years through a sale or IPO.
Key Differences Between Strategic vs. Financial Buyers
Because these buyers have very different goals, their approach to your business in an M&A process can vary significantly:
Business Evaluation
One major difference between Strategic vs. Financial Buyers is how they evaluate your business. Strategic buyers weigh synergies and integration capabilities heavily, while financial buyers look at standalone cash flow generation and earnings growth potential.
Strategic buyers often incorporate the acquired business and must consider acquisitions based on how the targets will integrate with their existing company. For example, strategic acquirers may ask:
Are your products sold to our customers?
Does your company serve a new customer segment for us?
Can we realize manufacturing economies of scale?
Do you have IP or trade secrets we want to own or keep a competitor from owning?
Since it won't integrate into a larger company, financial buyers generally evaluate an opportunity as a standalone entity. They focus heavily on the business’s ability to grow quickly in a short timeframe. Also, financial buyers often use debt financing to scrutinize cash flow generation to service debt.
It is important to note that not all buyers fit neatly into categories. Sometimes, 'strategics' just want to boost earnings and act like financials. And sometimes, 'financials' already own a company in your space and want strategic add-ons, so they evaluate more like strategics. Understanding the buyer's motivations shows how they determine value.
Investment Time Horizon
Another key difference is how long they plan to own the acquired business. Strategic buyers intend to keep a purchased business indefinitely, often fully integrating it. Financial buyers typically have a 5-7 year investment horizon.
This infinite vs finite holding period impacts how much a buyer will pay. When a financial buyer buys and then exits a business, the timing relative to the overall business cycle greatly affects their return. For example, if your business is bought for 8X EBITDA at the peak of a cycle but can only be sold for 6X EBITDA five years later, it’s hard to get an attractive return. So financial buyers are more concerned about business cycle risk than strategic buyers, and they consider various exit strategies before deciding to buy.
Industry Investment Merits
The industry a business is in will also have differing importance by buyer type. Since strategic acquirers are usually tied to a certain industry based on their core products/services, they heavily weigh how your business integrates with their corporate strategy. Strategic buyers often want acquisitions that can quickly and impact the bottom line.
Financial buyers look at the whole picture: your specific business and the broader industry. Since financial buyers aren't tied to one industry, they must evaluate both business attractiveness and industry attractiveness. It's common for financial buyers to hire consultants to help with this evaluation.
For highly regulated, unpredictable, or discretionary industries, pursuing strategic buyers can help mitigate industry risks.
Back-Office Infrastructure
Strategic buyers focus less on the strength of the target's existing back-office infrastructure (IT, HR, Payables, Legal, etc.) since many of these functions will be eliminated during post-acquisition integration, as the acquirer likely already has these systems.
However, since financial buyers don't already have these functions, they need this infrastructure to endure. So they scrutinize it during due diligence and often seek to strengthen it post-acquisition. Therefore, it's better to de-emphasize back-office infrastructure importance/value with a strategic buyer, whereas financial buyers expect a thorough evaluation of these functions.
Understanding differences between strategic vs. financial buyers differences is an important first step to a successful private capital market transaction. To learn more and receive a Free Valuation on your company, please contact any of our team members at PRIME exits.
About Dr. Allen Nazeri
Dr. Allen Nazeri, known as "Dr. Allen," brings over 30 years of global experience as a healthcare entrepreneur. Currently, he serves as the Managing Director at American Healthcare Capital and the Managing Partner at PRIME Exits. Throughout his career, Dr. Allen has provided strategic growth consulting to leadership teams of both privately held and publicly listed companies, ensuring their readiness for a successful exit.
Dr. Allen holds a Dental Degree from Creighton University and an MBA in M&A and Investment Banking from the University of Bedfordshire. He is also the esteemed author of "Value Engineering: Strategies to 10X the Value of Your Clinic and Dominate the Market!" as well as his brand new book, " Selling your company at a premium", As part of his services, Dr. Allen offers a Free Valuation to business owners preparing for a partial or complete exit strategy. Leveraging his extensive network, Dr. Allen collaborates with numerous strategic buyers, private equity firms, and a select group of institutional investors seeking high-quality healthcare investments. Remarkably, he takes direct accountability for the successful sell-side representation of nearly $750M in enterprise value annually.
To contact Dr. Allen, email him at Allen@ahcteam.com or Allen@pexits.com.
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