A strategic buyer is an individual or company who is typically a competitor of the company they’re trying to buy. They’re usually a company, and their aim in buying a competitor is to a) remove a little more of the competition and b) take over an organization whose objectives align with their own.
Ultimately, strategic buyers benefit hugely from each acquisition they make, and this alone makes them very appealing to sellers. Moreover, strategic buyers are typically in a better position than anyone else to outbid the competition, and they’re also usually more likely than anyone else to go through with a purchase.
In this article, we’re going to take a closer look at how strategic buyers operate and why you should target them.
Okay, so you’ve made the decision to sell your business.
But while many sellers spend a lot of time valuing their business, not as many consider who will buy it.
There are only a handful of types of buyers, and for the purpose of this article we’re going to look at the two main types:
The main difference between the two is that a strategic buyer is looking to buy strategic synergies that will complement – and even improve – their current operations. They’re looking to buy a company in their industry whose products or services can be easily integrated into their own operations.
A financial buyer is a bit different. Less interested in zoning in on businesses in their industry, they instead are more interested in investing in companies that will allow them to realize major returns from them.
Whereas strategic buyers are generally companies (and more rarely, individuals), financial buyers are Private Equity Firms that are looking to invest in companies before selling them on for a profit. Therefore, they look for companies that have good potential for growth and, if all goes will, they will put the business up for sale again in 5-7 years time.
Strategic buyers, then, want to buy businesses that align with their own operations.
Financial buyers, on the other hand, are just looking to make a profit. Your business might be “your baby,” but to a financial buyer it’s just an investment. To a strategic buyer, it typically becomes their baby.
As well as strategic buyers and financial buyers, there are also individual buyers. However, individual buyers typically don’t have as much capital, or access to capital, and therefore you’ll see them investing well before the $500k mark. Essentially, the smaller your business is, the more you can expect an individual to be the one looking at it.
And because individuals have more to lose, they will ask more questions and come up with reasons not to buy your business.
This brings us nicely onto the next point:
Throughout your career as a business owner, you’ll hear more than a few people telling you that you should sell to a strategic buyer instead of a financial buyer. There are a few good reasons for this:
You’ll get more change out of a strategic buyer simply because they’re looking to increase synergies from both companies – the one they currently own and the one they’re looking to buy off you (which is in the same industry). Ultimately, a strategic buyer won’t require any help from you when they take over your business.
Strategic buyers are typically more willing to up the ante when bidding for a business because they know they’ll get a lot of benefit out of it. Cost synergies is a key benefit, for example. When the buyer purchases your business (a rival selling similar products), they know they can duplicate the functions. They will obviously keep the sales, but many of the costs, such as rent on premises, suppliers etc, can be duplicated.
In other words, they can absorb numerous core aspects of your business into theirs while keeping those sales.
Another reason a strategic buyer will pay more is down to the variation multiple. Essentially, a strategic buyer might purchase your company (which is smaller than theirs) at a lower PE than their own company’s multiple. Therefore, as soon as the sale has gone through, they’ve just added more to their business’s value than the cost of the purchase.
We’d all prefer to get deals closed fast, but sometimes buyers will drag their heels.
Strategic buyers, however, already understand your company simply because they operate in your industry. This ensures a smoother acquisition process with less niggles. They’ll still scrutinise your books, but they’ll do it quicker than a buyer who’s unfamiliar with your space.
Not only will strategic buyers close deals faster, they’re also more likely to actually close deals, period.
A prime reason deals don’t get closed is because surprises pop up that unnerve the buyer. Because a strategic buyer understands your structure much more, there’ll be less surprises for them.
The thing with selling a small business is that the business is our baby. We founded it, launched it and now we have to let it go.
As such, sellers tend to have a very paternal attitude to the business they’re selling. They want to make sure it’s going to a good home and that the next owner will take good care of it.
When you sell to a strategic buyer, you can pretty much guarantee they will look after it.
The ironic thing about strategic buyers is that, while they stand to gain hugely from buying out small businesses, and while they’re willing to pay more than other types of buyers, they’re often not actively sniffing out companies to buy.
As such, it’s your job to find them.
Usually, if a company is very large, they’ll have corporate development teams that are dedicated entirely to working on business purchases. However, smaller organizations won’t have the same amount of cash to employ such full-time teams. As such, the company director typically takes on the role of making acquisitions. This is because they understand the value of buying up a competitor.
However, because a company director naturally doesn’t have too much time on their hands, they won’t come across your business for sale if you engage in passive advertising alone. They won’t see your ad. In order for a company director to even be aware that your business is up for sale, you need to uncover them yourself. You can also work alongside a broker who will help you uncover viable strategic buyers.
Merely identifying a strategic buyer isn’t enough, though. You also need to make sure they’re the right fit for your business – in other words, they’re the right size and have the right financial muscle to make the acquisition. To learn more about this, you can take a look at publicly-available financial records. These will help you to gain insights into how financially solid the company is.
Once you’ve identified suitable companies, you then need to make your approach. You could email them, but this usually isn’t sufficient. The best approach is instead to go to them individually yourself and clearly demonstrate how acquiring your business represents a great opportunity for them. You should also highlight the risks of missing out.
At the same time, it’s really important that you prepare your business for sale (you can learn more about preparing your business for sale here). By preparing your business for sale and presenting it in a way that the strategic buyer can see the advantages of buying it, you’re boosting your chances of making a successful sale. Moreover, you’ll also generate demand between a number of buyers, which can only enhance the value of your business.
Selling a business for the best possible price and on terms that suit you requires you to concentrate on strategic buyers. As we’ve seen, strategic buyers will pay more, they’ll be more willing to close a deal faster, and they’ll also treat your business just as well as you treated it. They’re not looking to make a quick buck here – they want to care for your company.
Use the tips in this article to find a strategic buyer. Make sure you do all the prep work in the meantime to bump up the value of your business and make it look as presentable and desirable as possible.
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