Whether you're considering selling your business now or planning for a future sale, understanding the mindset of different buyer types is crucial. 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, often competitors, suppliers, or customers of your firm. They seek companies whose products or services can integrate synergistically with their existing business to create long-term shareholder value. These buyers may also be unrelated to your company but aim to diversify revenue by growing in your market.
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 with the aim of realizing a return on investment within 5-7 years through a sale or IPO.
Due to their different goals, strategic and financial buyers approach your business in distinct ways during the M&A process:
Business Evaluation Strategic buyers focus on synergies and integration capabilities, while financial buyers emphasize standalone cash flow generation and earnings growth potential. Strategic buyers consider how the acquisition will integrate with their existing operations, asking questions like:
Are your products sold to our customers?
Does your company serve a new customer segment for us?
Can we achieve manufacturing economies of scale?
Do you possess IP or trade secrets we want to own or prevent competitors from owning?
In contrast, financial buyers evaluate an opportunity as a standalone entity, focusing on rapid growth potential and cash flow generation to service debt, often using debt financing.
It's important to note that not all buyers fit neatly into these categories. Sometimes, strategic buyers may act like financial buyers, aiming to boost earnings, while financial buyers may evaluate potential acquisitions strategically if they already own a company in your space.
Investment Time Horizon Strategic buyers typically intend to keep a purchased business indefinitely, integrating it fully. Financial buyers generally have a 5-7 year investment horizon. This difference impacts how much a buyer will pay and how concerned they are with business cycle risks and exit strategies.
Industry Investment Merits The industry a business operates in holds different significance for each buyer type. Strategic buyers, tied to their core products and services, heavily weigh how your business integrates with their corporate strategy. Financial buyers, not tied to one industry, evaluate both the business and industry attractiveness, often hiring consultants for this assessment. For highly regulated or unpredictable industries, strategic buyers can help mitigate industry risks.
Back-Office Infrastructure Strategic buyers place less emphasis on the strength of the target's back-office infrastructure, as many functions will be eliminated during post-acquisition integration. Financial buyers, however, need this infrastructure to endure, scrutinizing it during due diligence and seeking to strengthen it post-acquisition. Therefore, it’s better to de-emphasize back-office infrastructure value with strategic buyers, while financial buyers expect a thorough evaluation of these functions.
Understanding these differences between strategic and financial buyers is a vital first step towards a successful private capital market transaction. To learn more and receive a free valuation of your company, please contact any of our team members.
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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