Why we go first to strategic buyers
Strategic Buyers Pay More than Financial Buyers
An operating company has a much greater ability to extract incremental value and mitigate business risk than could any financial buyer who does not already have a company like yours in its portfolio. If they do, then they are a hybrid, sharing some characteristics, propensities and proclivities, of each – and all things being equal, would pay more than an uninitiated financial buyer and less than an operating company. They are either like a strategic buyer with more financial discipline, or a financial buyer more comfortable with operating risk.
The key distinction is the relative differences in the granularity, validity, and confidence in the results of, evalua-tion of the business they hope to buy. A strategic buyer, being an operating company is already on the ground and knows the terrain; a financial buyer flies at thirty thousand feet and has side scan radar informed by algo-rithm. A strategic buyer is already acquainted with the risk inherent in your business – market risk, product risk, competitive risk, regulatory risk and the like. They do not have generalized fear to be hedged with a discounted purchase price – they have specific fear of challenges for which they have already developed risk mitigation strategies and know the art of the possible. Key to all of this is that the operating company acquirer already has a management team accountable for operational outcomes that can go hands-on to solve problems. A financial buyer has a cadre of MBA’s and analysts who know most of the vocabulary relevant to your business but have never met a payroll. A strategic buyer is intimately aware, in operational detail, of their own capabilities, strengths and weaknesses. When they assess your company for a possible acquisition, they are not only taking inventory, they are figuring out how to possibly make two plus two equal five – through sales synergies, adoption of best practices, economies of scale, and elimination of redundancies, down to a minute level. The staff of finan-cial buyers can identify risk, certainly, but their only tool for dealing with it is to apply a quantitative risk factor to the purchase price formula. The financial buyer must meet financial performance criteria at the end of an aver-age five-year hold, after which they exit the business by selling it to somebody else, hopefully at a profit. The way they get there is with you and your management team, or your successor management team. The strategic buyer knows in granular detail, from the outset, how to get themselves to where they want to go – and they do it with their own management in charge, and accountable.
Both strategic buyers and financial buyers acquire companies, hundreds and thousands of companies every year. The buyer who perceives themselves to have better information, and therefore has less fear, will generally pay more for the same business. That is why we approach any potential strategic buyers first in a company or operat-ing unit sales process. Strategic Buyers vs. Financial Buyers – Some Specifics
With hundreds of financial buyers to put on prospect lists, depending on the size, profitability, growth prospects, and industry of your business, you might consider an equity or venture fund to be a viable choice, or at least a good fallback position if you do not attract a strategic buyer. Whether, how fast, and how much you decide to expend energy in this direction should first be informed by the following considerations:
The time horizon for equity funds in any investment is about five years, more, at sufferance, if there is no viable exit option at that time, less if a great opportunity to exit arises sooner. To begin with, then, your business must be sufficiently healthy and proven in financial operating performance to make a case that it will be substantially bigger than it is now within five years. If your business is anemic, you will burn a lot of energy trying to find a fi-nancial buyer, with iffy chances of success. Here is a summary of some other factors to take into consideration when determining how to apply your energies among strategic and financial buyers:
Strategic Buyers Look for:
- Management expertise unique to your business and not currently resident in theirs – management both necessary and incremental to management skill sets at acquiring company.
- Cross-sell opportunities, particularly to a marquee client list that does not overlap with acquirer
- Opportunity for geographic expansion and further scaling within geographies now served
- Opportunity to increase market share and improve pricing power
- Opportunity to increase vertical penetration and thereby increase margins for sales to all customers
- Opportunity to strengthen defensive barriers relative to acquirer’s existing competitors
- Opportunity to realize synergies, both top line syner-gy by selling more with less than the simple additive cost of the buyer and seller marketing and sales or-ganizations, and expense synergies obtained by elimi-nating redundancy and achieving economies of scale.
Financial Buyers Look for:
- Functionally complete, fully aligned, stand-alone man-agement team, incentivized for long-term, indefinite tenure.
- Recurring, repetitive (not project) revenues to yield most revenue from least marketing and sales effort
- Technology enablement of service/product delivery to provide value at least expense
- “Platform” solutions vs. point or custom-configured solutions, to minimize complexity and expense. Re-peatable formulae for entry into new markets
- Vertical domain specialization and expertise to distin-guish the value, and focus the resources, of the busi-ness. Differentiation from large competitors so growth is not impaired when a large a competitor notices.
- Scalable service delivery and G&A so overhead grows more slowly than revenues
- Proven sales and marketing organization because fi-nancial buyers don’t have any and don’t want to be accountable for selling anything themselves.