Which
Is Better, a Financial Buyer or a Strategic Buyer?
If you decide to sell your business to an outside acquirer,
you’re going to have to decide between a financial and a strategic buyer—understanding
the different motivations of these two buyers can be the key to getting a good
price for your business.
A financial buyer is acquiring your future profit stream,
so they will evaluate your business based on how much profit it is likely to
make and how reliable that profit stream is likely to be. The more profit you
can convince them your company will produce, the more they will pay for your
business.
But there is a limit to how much they will pay, because
financial buyers are playing the buy-low, sell-high game. They do not have a
strategic rationale for buying your business. They don’t have an army of sales
reps to sell your product or a network of retailers where your product could be
merchandised. They are simply trying to get a return on their investors’ money,
so they tend to buy small and mid-sized businesses using a combination of this investment
layered on top of a pile of debt, and they want to buy your business as cheaply
as possible with the hope of flipping it five or ten years down the road.
Because financial buyers are usually investors and not
operators, they want you and your team to stick around, so they rarely buy all of
a business. Instead, they buy a chunk and ask you to hold on to a tranche of
equity to keep you committed.
A strategic
buyer is a different cat—usually a larger company in your industry, they are
evaluating your business based on what it is worth in their hands. They
will try and estimate how much of their product or service they can sell if
they added you into the mix. Because of their size, this can often lead to
buyers who are willing and able to pay much more for your business.
Tom Franceski and his two partners had built DocStar up to
45 employees when they decided to shop the business to some Private Equity (PE)
investors. The PE guys offered four to six times Earnings Before Interest Taxes
Depreciation and Amortization (EBITDA), which Franceski deemed low for a
fast-growing software company.
Franceski was then approached by a strategic acquirer
called Epicor, which is a global software business with a lot of customers who could
use what DocStar had built. Epicor offered DocStar around two
times revenue—a much fatter multiple than the PE firms were offering.
*** Richard Kranitz (Wisconsin) is an experienced attorney and business consultant in the areas of corporate, securities and tax planning for corporations, partnerships, joint ventures, limited liability companies, multi-unit enterprises, and a variety of different non-profit entities. In addition, he has counseled their owners and executives in compensation planning, estate plans, and asset protection. Attorney profile at: https://solomonlawguild.com/richard-a-kranitz-esq
