What do you want to do after selling your business? Start a new venture, work a less time-intensive job, or see your current business grow with better resources?
Whatever your goals, finding the right buyer can help you achieve them. Buyers come in two main categories, strategic and financial, and understanding their differences can help you attract the best offer.
A strategic buyer acquires businesses that complement or augment its own, resulting in cost savings or additional income.
A financial buyer acquires your business to earn a return on investment, usually in another exit event several years after acquisition.
To discover which buyer you should target as you prepare your business for exit, read on for our analysis of strategic buyers vs. financial buyers.
What Is a Strategic Buyer?
A strategic buyer is a company looking to expand through acquisition. Often, strategic buyers search for target companies in the same industry (including competitors) whose assets complement theirs. These target companies help buyers achieve strategic aims, such as:
- Reducing competition. Buying out competitors increases a strategic buyer’s market share. They can also acquire whatever assets their competitors used to compete.
- Expanding product lines. Strategic buyers can acquire another company’s products and services, rebranding them to target a new or larger market.
- Expanding into new territories. Strategic buyers can also acquire customer lists. In 2018, for example, Comcast Corporation in the US acquired European telecoms giant Sky PLC, expanding its reach to millions of customers across Europe.
- Cutting time to market. Rather than build a specific technology, a strategic buyer can acquire it, saving months or even years of development time and getting their product or service to market sooner.
Strategic buyers use acquisitions to help achieve their companies’ goals. Financial buyers, on the other hand, acquire and grow companies to realize a financial return on their investment.
What Is a Financial Buyer?
A financial buyer acquires, scales, and potentially resells a business for a financial return. Financial buyers look to achieve that return through increased cash flow and potential exit strategies that will attract high-paying investors in three to five years.
What kind of businesses do financial buyers look for? They want a stable, well-run business with promising growth plans in place. Financial buyers use either capital or expertise to increase economies of scale while reducing expenses for the acquired business.
Most financial buyers are private equity firms, venture capitalists, or hedge funds who can access the cash and expertise to scale your business.
Does a Strategic or Financial Buyer Pay More?
Strategic buyers might pay a premium for a strategic advantage. In the long run, that advantage is usually worth more than their investment in your company. Rather than worry about your financials only, strategic buyers also focus on how your business helps achieve long-term goals.
For example, Disney acquired Pixar Animation Studios for $7.4 billion in 2006 for its animation technology and film catalog. In the 17 years since then, Pixar’s ten highest-grossing films have earned over $11.9 billion in box office sales alone. Imagine the revenue generated from merchandise sales too.
On Acquire.com, PartnerHero acquired Hosam Hassan’s consulting business, SupportOps, for almost ten percent more than his asking price. Why? Because ParterHero wanted the training procedure Hosam had developed for its remote helpdesk consultants. ParterHero would use the procedure to improve its service and win more clients. Meanwhile, Hosam got a six-figure exit and the chance to do more of what he loved for a business he originally valued at $15,000.
Strategic buyers also look at your industry impact. When Joseph Choi sold his newsletter business Tech Pod on Acquire.com, the buyer, a Series A recruitment startup, believed the intangible assets of brand loyalty and engagement were worth more than its revenue. Unlike a financial buyer running an investment portfolio, the recruitment startup could use Tech Pod to advise job-hunting students while expanding its candidate pool.
Does that mean financial buyers will always lowball you? No, but expect them to negotiate a purchase price that gives them room to earn a return. Based on your current metrics, they’ll forecast your earnings and usually offer a price that predicts a return in three to five years.
Strategic buyers, meanwhile, see value in your business through growth and expansion, whether it’s adding product lines or reaching new markets. And in some cases, a higher purchase price is worth acquiring those complementary assets.
What Other Differences Separate Strategic Buyers vs. Financial Buyers?
Aside from the purchase price, several other factors separate strategic and financial buyers looking to acquire your business.
- How long they’ll hold the investment. Strategic buyers typically hold newly acquired businesses indefinitely because they absorb the assets into their company. They’ll hold onto those assets provided they continue contributing to the company’s goals. Financial buyers, however, want to earn a return as fast as possible after scaling the existing business. Private equity firms, for example, aim for a three-to-five-year turnaround to scale and resell your business.
- What they’ll do with your startup. How strategic buyers handle your assets depends on their goals. Do they want to integrate specific technology or employees? Do they want to change your direction or use your product differently? Prepare for changes to your operations, strategy, people, and assets. Financial buyers usually apply their expertise (or hire operators) to scale your startup. They probably won’t change too much. The more self-sufficient your business is, and the more customers you delight, the happier a financial buyer will be.
- The industries they’ll explore. Strategic buyers tend to look for targets in a similar industry. But for financial buyers, opportunity is everywhere – they’ll explore the most lucrative investments across any industry, pursuing several at a time for maximum ROI.
No matter the differences, both buyers want to add value to their existing businesses and investments. So to which type of buyer should you sell your business?
Why Sell to a Strategic Buyer vs. Financial Buyer?
What do you want to happen to your startup after acquisition? Who has the best resources to give it a successful run? Answering questions like these will help you decide the best action for your startup sale. And since some businesses take months or years to prepare for exit, setting acquisition goals now will help you target the right buyer, strategic or financial.
Strategic buyers tend to be fewer in number than financial buyers. Why? By their nature, a strategic buyer is looking for that popular term synergy, or in other words, a unique quality about your business that complements theirs. You can better your chances of attracting strategic buyers by compiling a candidate shortlist and adjusting your business to align with theirs. An M&A advisor can also help you prepare for this long before listing.
Perhaps you want to make enough money to fund your next startup venture. If you sell a pre-or-low-revenue business, financial buyers might be reluctant to make an offer. Strategic buyers, however, might need the technology you’ve built and might pay a price that reflects the time and energy you spent building it.
That’s not to say you shouldn’t target a financial buyer. With more of them, it’s easier to sell, and if you’re growing and profitable, you’ll attract more offers. You can also consider other deal components such as earnouts to close any gap in your pricing expectations. Many founders, like MyWorks founder Peter Leonard, stay on post-acquisition to help hit earnout targets.
Here’s Why You Should Sell to a Strategic or Financial Buyer on Acquire.com
Worried about finding a good buyer? Acquire.com’s vetting process will ease your troubles as a first-time or repeat seller. We offer a large, diverse, and vetter buyer pool with verified IDs and funds. Whether you want to pursue a strategic or financial buyer, for an acquisition large or small, we can help you achieve your entrepreneurial goals.
Sign up for your free seller account now.
What Is an Individual Buyer?
An individual buyer is someone looking to own a small or middle-sized business without starting it themselves. They’ll scour listings on sites like Acquire.com to find a company that fits their entrepreneurial lifestyle.
Perhaps the corporate world burnt out an individual buyer, and they’re looking to run a business on their terms. Or maybe they want to integrate more family time into their daily routine. By acquiring a growing and profitable small-to-middle-sized business with efficient operations, the individual buyer can focus solely on scaling an already successful startup. No late nights frantically preparing for launch or weekends on the phone with reluctant investors. The connections, employees, and processes should be in place for the individual buyer to take over.
Are Strategic Buyers Asset Managers?
No, strategic buyers are not asset managers. Strategic buyers are generally employees, directors, or founders of a company acquiring another, while asset managers work independently as financial or portfolio advisors. They might also work on behalf of an investment bank or other financial institution.
How Do Antitrust Laws Affect Strategic Buyers?
According to the Federal Trade Commission, antitrust laws “protect the process of competition for the benefit of consumers, ensuring there are strong incentives for businesses to operate efficiently, keep prices down, and keep quality up.” These rulings prevent “unlawful” mergers and acquisitions from happening so that one company doesn’t monopolize the market and take advantage of consumers.
Since strategic buyers intend to grow their business and reduce competition, the FTC closely monitors certain acquisitions to ensure they don’t break antitrust laws. For example, last year a federal judge blocked the proposed merger between publishing houses Penguin Random House (PRH) and Simon & Schuster. Given that both companies belong to the “Big Five” publishers (PRH, Simon & Schuster, HarperCollins, Macmillan, Hachette Book Group), it would’ve heavily reduced competition and potentially harmed authors.
When selling your business to a strategic buyer, ensure the transaction doesn’t reduce competition to the point of an antitrust lawsuit.
The content on this site is not intended to provide legal, financial or M&A advice. It is for information purposes only, and any links provided are for your convenience. Please seek the services of an M&A professional before any M&A transaction. It is not Acquire’s intention to solicit or interfere with any established relationship you may have with any M&A professional.
