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Insight Newsletter
How to Prepare for Different Types of Buyers
There is a difference between financial and strategic buyers.
by William S. Hanneman
Owners of businesses should understand
that selling to a buyer with a financial
orientation would be quite a different
experience than selling to one that is pursuing
a strategic objective. Understanding those differences
in both perspective and process will
greatly improve the probability of achieving
expectations.
The difference between a financial and
strategic buyer is rather simple. A financial
buyer views the target business as a standalone
entity that has its own life and future
prospects based on the company’s market position
and the strategic direction established by
existing management. A strategic buyer views
the same business as having certain attributes
that can fit into its already established strategy
and infrastructure (usually an established business).
In essence, the strategic buyer views the
target business as a collection of ingredients
while a financial buyer sees a finished product.
It is commonly thought that financial buyers
are synonymous with private equity firms
and only business corporations are strategic in
nature.While that used to be a valid distinction,
the lines have been blurred as private
equity has expanded its ownership of corporate
America. Today, a private equity fund
invested in a current portfolio company may
well be a strategic buyer. Similarly, companies
pursuing conglomerate growth strategies will
act much like financial buyers.
IT'S A MATTER OF PERSPECTIVE
Strategic buyers have specific views on the
best strategy to succeed within their industry.
They already possess a particular collection
of assets, customers, supply relationships, and
management from which they have developed
a unique view of the future. That knowledge
allows them to view the attributes of a target
business and determine quickly how those attributes
can be integrated with what they already
possess to create a stronger, more profitable
business. Change is a common theme. Strategic
buyers believe that they can either create revenue
enhancements or reduce costs (or both)
as a result of integrating the target’s assets and
capabilities. The intention to integrate the two
businesses means that the strategic buyer needs
to own 100% of the target business.
.........
Today, a private equity fund
invested in a current portfolio
company may well be a strategic
buyer. Similarly, companies
pursuing conglomerate growth
strategies will act much like
financial buyers.
..........
Because financial buyers bring only their
money to the equation, there is no integration
to consider. They view the business as a standalone
enterprise. Financial buyers often have
no industry strategy framework from which to
evaluate the target business. Gaining that perspective
is essential prior to making a determination
of interest. That can take time. Rather
than change, financial buyers desire stability,
which can lead to a transaction where less
than 100% of the business is purchased in
order to create an incentive for continuity of
management and employees.
TRANSACTIONS ARE APPROACHED DIFFERENTLY
Understanding the perspective of each
type of buyer is not simply an etymological exercise.
The differences have real implications
for how each will approach a transaction.
.........
Understanding the perspective
of each type of buyer is not
simply an etymological exercise.
The differences have real
implications for how each will
approach a transaction.
..........
Value
A strategic buyer evaluates a target
business based on what the acquired assets can
contribute to its existing business strategy. Oftentimes,
the value of the seller’s assets in the
hands of the strategic buyer will be worth more
than the same assets in the hands of the seller
or a financial investor. What the strategic buyer
will ultimately pay depends upon a number
of factors, including its assessment of the cost
to independently build the asset or capability
("build vs. buy"), and the implication to its
competitive position if the opportunity is lost
to a competitor.
If the strategic buyer is a public company,
an additional constraint can raise its head.
Public entities are always sensitive to earningsper-
share. Most strategic buyers will not make
an offer that will cause earnings-per-share dilution
in the long run.
Due Diligence and Timing
Because they
already operate in the industry, strategic buyers
are already knowledgeable about the current
trends and the competitive environment. As
such, they will spend the bulk of their due diligence
effort on verifying the specific attributes
of the target and how the pieces would be integrated.
Financial buyers use the due diligence
process to first confirm the desirability of the
industry, and then the business. Because the
entirety of the enterprise is the target, they are
highly concerned about understanding everything
about the entire "machine." It is quite
typical for financial buyers to engage outside
professionals to assist with conducting a comprehensive
business review, market studies,
a quality of earnings assessment, and background
checks on key managers. Transferability
of all assets, employees, and relationships
are paramount. Making sure "everyone" is on
the same page after closing is essential. This
can be laborious and time consuming.
Making acquisitions is a core competency
of financial buyers. So, once a decision to acquire
has been made, financial buyers can often
move faster. As a result, they follow a wellworn
playbook to evaluate, finance, and close
acquisitions. Strategic buyers tend to have
slow internal processes. They may not have
a dedicated merger and acquisition team and
may be encumbered by slow-moving boards of
directors and investment committees. Many
set annual budgets for investments and may
need to secure extra resources or delay their
bids to the next budget cycle.
Given this difference in timing, if including
both financial and strategic buyers in the
process, it makes sense to give financial buyers
a head start. And, because the probability
of closing with a financial buyer tends to be
lower than with a strategic buyer, choose an
advisor that understands the profiles and styles
of the different parties.
THINK ABOUT THE DIFFERENCE BEFORE STARTING
The best advice that can be given is to
know the audience and design a sales process
accordingly. When positioning a business for
sale, different types of buyers require different
positioning strategies. Therefore, the thrust of
materials, conversations, presentations, and
timing should be very different depending on
the audience.
Financial buyers need to be schooled on the
comprehensive macro view of the industry and
the micro view of how the target company competes
within that framework. Particularly key is
a clear articulation of how the company is going
to grow its revenue and free cash flow. Management
should be showcased; back office and operational
capabilities must be emphasized.
Each strategic buyer should be viewed separately.
Discussions and presentations should
be focused on the uniqueness of the target
company’s attributes and how the financial
performance will change if the company is
combined with the suitor’s business, assets and
capabilities.
Given that different types of buyers make
decisions on different schedules and processes,
it makes sense to accommodate those differences
in the process so that all will be ready to
commit simultaneously.
In most cases, it makes sense to consider
both types of buyers. By evaluating both alternatives
simultaneously business owners can
make the best decision for themselves and the
company.
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