Strategic vs. Financial Buyers: Maximizing M&A Transaction Value

No two buyers or investors are created equal. Differences in capital structure, management methodology and market expertise can all play a key role in process, timing and closing of deal.

Here we’ll discuss some of the nuances between financial and strategic buyers and how the subtle differences between the two can mean big differences when it comes time to get a deal done.

What is a strategic buyer?

When it comes time to find a buyer for your securties (whether you’re selling shares in a capraise or in an M&A transaction), the best approach is to source capital for your transaction from someone who understands your market. A strategic buyer is usually in a similar industry as the seller, if not the same one. It’s a company that can strategically benefit from the acquisition due to identified synergies. These synergies are enhanced revenues or reduced costs that result from added products or services, combined market share, market entry, combined talent and expertise, intellectual property, etc. They want to “buy and hold.” 

What is a financial buyer?

A financial buyer is usually a private equity firm, a venture capital firm, or other institutional investor. It’s a firm that is in the business of buying businesses in order to make a return to their investors. Unlike a strategic buyer, this firm is not likely to buy for synergies unless the business is an add-on for one of their portfolio companies. The firm will rather make the acquisition with an exit and required return in mind. The mantra is to “buy low and sell high.”

What does each type of buyer look for?

As stated above, financial buyers are not planning on benefitting from synergies or keeping the business forever. They usually make an acquisition to add to their fund, planning to sell the company after 5 years or so in order to make a return. With this exit in mind they will have a high-growth model in place in order to realize this return. This is an important point to make note of. A financial institution is required to return a certain percentage (IRR) to their investors. If they fail to do so, then they will have trouble fundraising in the future. Moreover, they typically have less capital to commit than a behemoth conglomerate and instead use debt to close the deal, committing only 20% or so of capital. Consequently, two things that are scrutinized while evaluating the investment are 1) having hard assets (PP&E) to secure the loans and 2) having enough free cash flows in the future to service the debt used to execute the acquisition. Among other things, they also want to know if the company is positioned in a growth market – i.e., can they expect to sell the company for more than what they paid.

I would also add that it used to be that financial buyers could make a good return from a straight financial acquisition. However, due to increased competition that is no longer the case. You can expect any financial buyer to use some degree of strategic elements in their investment in order to realize the desired return.

As for strategic buyers, they want to know what synergies can be identified from the acquisition. They want to know how the seller’s assets will contribute to their business strategy. This is a big reason why strategic buyers are assumed to pay more than financial buyers. Additionally, they will usually be planning to acquire the business for an indefinite amount of time. Therefore, the future returns will be greater for them than for a financial buyer.

Deal Efficiency

This may or may not be the first time a strategic buyer will be making an acquisition. They also have a business to run and may need extra time to work with the board of directors, as well as the rest of the bureaucratic hierarchy.

On the other hand, financial buyers are essentially in the business of making acquisitions and therefore the selling process typically moves faster with them. This is attractive because it increases the probability of closing a successful deal. Although the due diligence process may take longer, once a decision is made they have a proven pattern for effectively moving through each step until closing the deal.

It is important to understand the differences between these two types of buyers in order to set the right expectations. It is of equal importance to note that financial buyers may in fact be more strategic than assumed, and that a strategic buyer with a conglomerate growth strategy can have a more financial objective than assumed.

Considering these differences, it makes sense to solicit the help of an M&A advisory firm – someone who’s in the business of selling businesses – because they will know better how to adjust the selling process to the needs and interests of the different types of buyers.

Nate Nead on LinkedinNate Nead on Twitter
Nate Nead
Nate Nead is a licensed investment banker and Principal at Deal Capital Partners, LLC which includes InvestmentBank.com and Crowdfund.co. Nate works works with middle-market corporate clients looking to acquire, sell, divest or raise growth capital from qualified buyers and institutional investors. He is the chief evangelist of the company's growing digital investment banking platform. Reliance Worldwide Investments, LLC a member of FINRA and SIPC and registered with the SEC and MSRB. Nate resides in Seattle, Washington.
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