This is a frequent topic we review with prospective clients when discussing exit strategies in conjunction with their objectives. Depending on a seller’s objective, there are a number of potential buyers and in many instances, multiple options can be pursued simultaneously to optimize the range of alternatives, ensuring a transaction meets key objectives.
Strategic buyers are companies already in a similar line of business. Their goal is to improve their operations by pursuing vertical and/or horizontal synergistic opportunities by acquiring businesses. Financial buyers, such as private equity funds, family offices, and hedge funds, raise capital from outside investors to acquire businesses to grow and sell after a period of time. Financial buyers are typically industry agnostic and are likely to rely on existing management to grow and operate the business post-close.
Strategic buyers historically, but not always offer higher valuations and acquire 100% of the company with less future commitment from sellers. Financial buyers tend to offer lower valuations and usually require some form of reinvestment from sellers, while utilizing greater amounts of leverage. The seller’s reinvestment may lead to greater second and third “bites of the apple”.
A seller’s preferences related to valuation, leverage, risk, hold periods, management & employee continuity, and post-closing operations ultimately determine whether a strategic or financial buyer is the right option.