Selling to a Strategic Buyer

Show/Hide Info

Our focus today is on buyers: strategic, financial and synergistic. Different types of buyers will value your business quite differently, and the offer price will vary depending on the respective buyer’s constraints, strategic goals, and synergistic opportunities.

A financial buyer is a buyer whose primary focus is their rate of return on capital, and this focus means they typically face a cap on what they are willing to pay. Common financial buyers include Private Equity Groups. Also known as PEGs. They are usually not interested in running the business so they may look to the seller to remain with the company or have an extended transition period while they are searching for new management. PEGs may have strategic and synergistic opportunities within the portfolio of companies they own.

Strategic buyers are usually corporate and industry buyers with existing businesses. The existing businesses may be in industries related to the company being sold, they could be competitors, suppliers or customers. Or, the buyer may be looking to enter into a new industry. They are motivated to buy based on objectives such as: Obtaining additional capacity in a business they are currently in; revenue diversification; Expanding their product line; and expanding their market into new areas. Strategic buyers are often willing to consider paying a premium over market value for your business.

Synergistic buyers are usually corporate and industry buyers – similar to strategic buyers.   Synergy implies that the outcome resulting from the merger of two companies will be greater than the sum of the outcomes that would have been achieved if the organizations had not merged.   Think of Synergy as:   1 + 1 = 3. Synergistic buyers will be looking for acquisitions that provide: Process improvements, costs savings, revenue enhancement and balance sheet enhancement. Synergistic buyers, like strategic buyers, may be a premium for your business.

A buyer can be both a synergistic and a strategic buyer. What kind of buyer, strategic or synergistic will offer the best price for a business? Or in other words, pay the greatest premium for your business? All else being equal, it will be the firm that has the most to gain, whether it be from strategic or synergistic opportunities.

While everyone wants to receive a price over market value for their business, not every business will attract a strategic or synergistic buyer. These buyers often have size considerations that include paying higher premiums for larger businesses but the considerations may also include not being interested in buying businesses below a certain level.

Getting a premium for your business sounds great. There are a couple of important aspects to dealing with financial, strategic and synergistic buyers (1) in the selling process potential buyers, once screened will have access to your confidential information. Remember those buyers might be competitors, suppliers or customers (2) Also, after a close look at your business they might decide that it is better to build a new one rather than buy yours.

Once you have decided to sell your business and are targeting strategic and synergistic buyers, there are some special considerations with respect to marketing. These include:

  1. Risk management – to protect your company it is critical to use a robust buyer screening process and a Non-Interference Non-Disclosure Agreement
  2. Potential Buyers: ensure there is access to Private Equity Groups and industry lists to identify as many potential buyers as possible.
  3. Proactivity: Many of these potential buyers may not be looking to make an acquisition. You must be prepared to market the company proactively.
  4. Third Party Marketing: Its tough to sell your business to industry participants. We recommend you engage a qualified business broker to market the company, screen the buyers and manage the selling process.

Is your business a strong candidate for a strategic or synergistic buyer and how can you maximize the premium you get for your business? Get those questions answered by working with a reputable, skilled business broker and have an assessment done as part of your succession planning. Thank you for joining us today.