Types of Buyers in Mergers & Acquisitions
In the parlance of mergers and acquisitions, it is generally believed that there are two primary categories of buyers – strategic and financial. It is important to clearly define each category:
Strategic: A strategic buyer is an operating company with existing knowledge and/or expertise in the target company’s market or industry. This could be a competitor, vendor, customer or simply a company within the same vertical industry looking to expand offerings. Unlike a financial buyer, a strategic buyer will focus on finding a company that adds immediate benefits to its existing business and can provide synergistic opportunities, i.e., a one plus one equals three scenario.
Financial: A financial buyer is a buyer that invests in private or public companies on behalf of a larger shareholder/investor group. Once acquired, a financial buyer will work to improve the company’s operational and financial performance over a certain period of time and eventually sell the business to create returns for its investors. Financial buyers are generally private equity firms, investment funds, family offices, etc. that offer a wide variety of options for business owners from a reinvestment to a complete exit. When there is a strong owner and/or management team of a company, a supportive financial buyer can help the company grow by providing financing for acquisitions and other growth and cost reduction strategies.
Note: Once a financial buyer owns a portfolio company in a specific industry, it can very easily become a strategic buyer as they look to complete add-on transactions and grow through M&A.
Strategic Buyer Profile
According to Pepperdine’s “2019 Private Capital Markets Report”:
About 55% of closed business sales transactions over the last 12 months involved strategic buyers.
About 39% of the 92 respondents to the investment banker survey indicated that there was an increasing presence of strategic buyers making deals over the last 12 months.
About 21% of respondents did not see any premium paid by strategic buyers, while 56% saw premiums between 1% and 20%. The remaining 23% saw premiums more than 20%.
Pros of Selling to a Strategic Buyer
Selling to a strategic buyer creates many advantages for ownership and the company as a whole.
Possibility of a Higher Valuation: An operating company looking to grow through acquisition(s) may look beyond a seller’s profitability when preparing their valuation. Often Strategic Buyers are quick to identify synergies that could immediately enhance the target business and/or their own existing business. Example synergies include expanded customer reach, new vendor relationships, capability expansion, product cross-selling and improved market share among many others. In the article “Should You Sell to a Strategic Buyer?” JP Morgan states, “buyers are often willing to pay more than the accepted ‘going rate’ for companies in whose data, products or processes they have a vested interest.” The objective when marketing to strategic buyers is to highlight these synergies and provide accurate information to improve a respective buyers valuation model.
New Opportunities for the Company’s Stakeholders: In the lower mid-market, strategic acquisitions almost always create exciting opportunities for employees, customers, and vendors. When an acquirer begins with the mindset of growth, existing employees, especially the key management team, are relied upon to both plan and execute the strategy for capturing/realizing the identified synergies between the businesses. Employees also find themselves a part of a larger organization, which includes additional resources, career advancement opportunities and benefits that did not exist pre-transaction. Customers and vendors often experience similar benefits through increased resources and support.
Streamlined Due Diligence & Closing: There is a higher likelihood that a transaction with a strategic buyer will close and that diligence efforts may be less intensive. Due to the acquirers existing knowledge of the industry as well as their focus on specific synergistic elements, the diligence team will move quickly to verify their expectations without the hurdles that exist for a buyer who is completely new to the space. Additionally, transaction funding or financing relationships are likely to be already in place making the closing process less complicated than other ownership-transition options.
Reduced Ownership Transition: Often business owners and entrepreneurs culminate their professional careers with a transaction and are anxious to retire or pursue other personal or professional ventures outside of the business they’ve built. The transition of knowledge, relationships and responsibilities is an absolutely essential part of the acquisition integration process, and this can often take years and depending on the situation, this transition may be required post-transaction. A strategic buyer with intimate knowledge of the industry often has an experienced team in place that can greatly reduce or eliminate the learning curve and transition period.
Long Term Vision / No “Flipping”: Strategic acquirers use M&A to supplement organic growth and quickly work to fold the acquired company into their operation. This is in stark contrast to financial acquirers who typically have a 3 to 7-year investment horizon before the company/team must undergo another transaction.
Cons of Selling to a Strategic Buyer
Although there are many positive reasons for choosing a strategic buyer, there are risks and cautions that must be taken when considering a Strategic Buyer.
Confidentiality & Trade Secrets: Despite the execution of Non-Disclosure and Confidentiality Agreements by all parties, there remains understandable concern when disclosing information to a competitor, customer, or any industry player. The challenge is to disclose enough for a prospective acquirer to make an educated, valid offer without giving away any “secret sauce.”
Role Duplication: With the merging of two similar companies, there can be role duplication that leads to adjustments in the organizational chart. This truly is a case-by-case basis for each scenario, but the most common duplication is in the finance, HR, and payroll areas of the company.
Company and Brand Legacy: In some cases, synergies that create higher valuations also come with reduced expenses such as the consolidation of operations or the roll-up of a product portfolio. Business owners and entrepreneurs who have spent years building a connection to their community and a reputation within the industry may not feel comfortable moving forward with an acquirer who would make sweeping changes.
Transworld M&A Advisors’ Role in Selling to a Strategic
Strategic buyers tend to be more knowledgeable about the industry, more sophisticated, and more intolerant of surprises. Transworld M&A Advisors work closely with our sell-side clients to deeply understand the nature of their business, and to develop a comprehensive, Confidential Information Memorandum which discloses the good, the bad and the ugly about the company so that there are no surprises when a strategic buyer makes an attractive offer and proceeds through due diligence.
Transworld M&A Advisors work closely with our clients to understand their most highly desired outcomes – both personal and financial – and the most important issues/concerns they have with competitors, customers, vendors, and other industry players. We partner with our clients to develop a comprehensive list of potential buyers whom we reach out to directly and personally. We work closely with our clients throughout the process to ensure as much as possible that their desired outcomes are achieved, and their issues/concerns are addressed.
We coach prospective acquirers based on our client’s ideal transaction and scenario all while working to maximize perceived value. We are the buffer between sellers and prospective acquirers, and we help manage information disclosure, timelines and ultimately the entire transaction process. Throughout the process we will be working closely with your other trusted advisors, including but not limited to, your accountant and tax preparer, your attorney, your banker, and your financial advisor.
Transworld M&A Advisors engages in a limited number of projects at any given time to ensure we deliver the highest level of senior attention, expert advice, and transaction experience to each client.
If you are interested in learning more about Transworld M&A Advisors and our services, please do not hesitate to contact me directly at mertel@transworldma.com or (813) 299-7862.
© 2021, J. Michael Ertel PA