When it’s time to sell your business, you may have multiple buyers to choose from. You could receive offers from strategic, financial, and individual buyers.
As you start thinking about selling your business, think about what’s most important to you in a sale. Different buyer groups tend to operate by different playbooks. Understanding what each group typically has to offer can help us target the buyers who are the best fit for your business.
A strategic buyer is an existing business that operates in the same industry, or a synergistic industry, as your business. Strategic buyers may be a competitor, a client, or a vendor to your business. It’s almost just as likely, however, that you will have had no prior business relationship with the strategic companies interested in acquiring your business. And sometimes, you won’t even have heard of them before.
A strategic buyer is generally looking at your business as a path to growth with a long-term hold. Your business may present an opportunity to move into a new territory, new product lines, or a new distribution channel.
Pros of Selling to a Strategic Buyer
Higher value: Strategic buyers are often willing to pay more than financial buyers. That’s because strategic buyers may be able to realize immediate synergies and cost benefits.
Faster exit: If you are feeling burned out or you’re just anxious to get started on the next chapter of your life, strategic buyers typically enable you to walk away in the shortest amount of time. They already have experienced leaders who know your business and don’t need a long period of transition support.
Smoother due diligence: A strategic buyer already understands your industry and probably has a good grasp on how you do business. That means the due diligence process can go faster. They will still take a close look at your financials and business practices, but they can use their industry knowledge to work more efficiently and streamline decision making.
Easier financing: A strategic buyer is usually a larger established company with ready access to capital. Financing is less likely to be a hurdle than when selling to an individual or speculative buyer group that isn’t already funded.
Better opportunities for employees: A strategic buyer may be able to offer your employees a richer benefits package and greater opportunities to grow. A bigger company can offer new challenges and greater roles to step in to.
Advantages for your clients: Strategic buyers tend to be larger and more developed than the companies they acquire. That means your clients may gain access to a bigger service team, more advanced technology, or a wider breadth of services.
Cons of Selling to a Strategic Buyer
Employee reductions: Buying a business typically affords the acquirer some economies of scale. Unfortunately, that can lead to redundancies in management and administration. Worst case scenario, certain businesses (e.g., small manufacturers) could be acquired by a company that just wants their customer list and has capacity to absorb all their existing work – leading to a total shut down.
Legacy: When selling to a strategic, your name may not stay on the sign out front very long. It’s often just a year or two until your business is fully transitioned into the main company.
No equity options: A strategic buyer is typically going to purchase 100% of your business. If you were looking to maintain a minor equity stake and stay on to help the business grow, a strategic buyer is probably not the right one for you.
Culture: Ideally, you’ll be able to find a buyer with the same work style and cultural values as yours, but don’t expect your company to look and feel the same long term. A strategic buyer will be looking to shift your business practices to their way of doing things.
At the end of the day, every seller has a different goal for their business. There’s no right or wrong in choosing a strategic buyer over other options – only what’s the best fit for you. The better your advisor understands your goals, the better opportunity they have to find a buyer that meets your ideals.
Jim Friesen, MBA, CPA, CMA, CM&AA
Partner | M&A Advisor