M&A 101: What’s the Difference Between a Financial Buyer and a Strategic Buyer?

M&A 101: What’s the Difference Between a Financial Buyer and a Strategic Buyer?

The world of mergers and acquisitions can be complex for owners focused on building their companies.

We’re often asked by owners about their options to exit and sell the company. Often, work needs to be done to prepare – in advance of any sale process – to ensure maximum value is realized. Owners may opt to bring in an outside perspective like an interim executive to provide an operational roadmap to improve operations and package the company for eventual sale. This process, however, typically begins with two types of targets in mind:

Strategic buyers (Strategics) are companies who are already operating in the field/industry where acquiring your business will be complementary to their business, expand their customer base, or give them a competitive advantage.

Financial buyers include private equity funds, family offices, and individual investors who provide their own equity funding and borrowing to acquire businesses as a path to future gains.

Let’s dive in to the difference between strategic buyers and financial buyers:

Strategic Buyers

If you were a pharmaceutical company, one of the first places to go may be strategic buyers like Pfizer, J&J, Abbott, or Bayer who have an inherent interest in everything going on in their industry.

Never say never, but in general, strategic buyers buy much more often than passively invest. Companies used to be the only type of strategic buyers. You had a company, you nurtured it, you sold it to someone with a vested interest in the industry.

The strategic landscape didn’t always look this way…in the Internet bubble strategic investors were sometimes called the dumb money. Strategics felt they were missing out, so lots of corporations formed their own internal VC funds. They tended to have lots of cash and fund managers who were employees on salary who cared less about valuation than having a portfolio to show. With pressure to get access to deals no matter what, these managers felt compelled to invest in companies that were revolutionizing their own industries.

The rise of the private equity industry created a new kind of strategic buyer, as concentrations of capital created platform companies eager to acquire competition using the fund’s considerable capital. PE funds or investors become strategic buyers when a tack-on acquisition could help one (or more) of their portfolio companies grow even more. You often hear of rollup strategies where a PE fund sets out to pick up as many companies in an industry as possible to create a mega-sized organization at scale.

Selling to a strategic usually comes with questions around how your company fits into their product line, customer base, technology, brand, systems, people and culture.

Financial Buyers

Financial buyers, like private equity funds, will typically acquire or invest in a company when they see a path to growth.

How does it work? Take a PE fund, for example, where acquisitions always have a time horizon – a goal to sell a company, say within 5 or so years. Generally, the outside limit is the fund’s duration, or the time horizon to getting a return on all of their investments. Many PE funds and VC funds have a 10-year lifespan. They tell their Limited Partners investing in the fund that they will spend about 5 years or so investing, and then work on harvesting the next 5 years. The fund’s general partner or manager is paid management fees to oversee the portfolio, but the goals are only truly aligned by upside from gains from investments.

With limited time horizons to get the most from their investments, PE funds typically make upgrades fast within a company once acquired whether that means putting systems in place around financial reporting and controls or streamlining operations and processes.

The good news is that for savvy, prepared company owners, if you’ve built a company with strong attributes, in most markets and industries you’ll now have multiple options for exit or company sale.