Are Financial Or Strategic Buyers Better?

It is common for business owners to question what is better—a financial buyer or a strategic buyer. The answer depends on the buyer, their offer, and most importantly, their fit with you and your company. In most cases, it truly comes down to value.

What is the Difference?

First, it’s essential to understand the fundamental differences between financial and strategic buyers.

Financial Buyers

A financial buyer's goal is to invest in a business to profit from returns on their investment. Private equity firms are common financial buyers. They seek out companies with strong growth potential and use leverage to generate significant financial returns within a period of around five to seven years before selling the business or taking it public. Unlike a strategic buyer, financial buyers are usually open to investing in different kinds of companies and sectors with the goals of growing cash flow, cutting expenses, and creating economies of scale. Because of their motivations, financial buyers will tend to apply more scrutiny when it comes to a company’s financial due diligence and to see financial consistency.

Another attribute of a financial buyer is that they often use debt to finance acquisitions. They can use as much as 80% of borrowed funds to get a deal done.

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Strategic Buyers

A strategic buyer aims to achieve horizontal or vertical expansion for a company and strategic synergies designed to improve the business. They seek out companies whose products or services can easily integrate with their existing operations while maintaining alignment with long-term business plans. These long-term plans can include providing new offerings for customers or suppliers, expanding product lines, tapping into new markets, or becoming more competitive in the existing market.

Another key difference is that strategic buyers are typically willing to put more money on the table to acquire a company. This is because they are in a better position to reap synergistic benefits early on in the investment due to economies of scale. The better the fit between the two companies, the more a strategic buyer is likely to spend to make a deal happen.

It is also important to note that strategic buyers are often large and well-established companies. They have access to capital and currency in the form of stock, which gives them more options in making an acquisition.

So Which One is Better?

When it comes to financial versus strategic buyers, one isn’t necessarily better than the other. It depends on your objectives as a seller to determine which fits your needs better.

If your primary objective is to get the most money in the sale of your company, you may want to consider a strategic buyer simply because they may be more likely to offer a higher price if they believe in your business’s fit with their goals. If your objective also includes caring for the company's future and employees, a strategic buyer may still be the right choice because you can set covenants in the deal to provide certain protections.

If you want to cash out on the business but still want to remain involved, a financial buyer may be the way to go. A financial buyer might have the money to invest in your company but not have the appropriate level of knowledge to operate it, so they’ll still need your expertise to run the show. You can sell a stake in the business but retain some ownership, and if the company demonstrates growth, you can cash in on a second payday.

If you need guidance regarding the sale of your company, our experts at Benchmark International would love to discuss what is suitable for you and how to make it happen.

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