Strategic Buyers
Strategic vs. Financial Buyers
Generally speaking, a strategic buyer is likely to recognize a higher valuation for your company than a straight financial buyer. Strategic buyers seek acquisitions that will help make their business perform better, while financial buyers are focused on the economic value that the business will generate on its own. Many times the strategic buyer will have a larger business than that being purchased, thus able to leverage the new acquisition and realize the business’ highest return. Strategic buyers typically pay more and sometimes buy when no one else will. Ideally, a seller would like to entice more than one strategic buyer, resulting in a bidding situation.
Finding the Strategic Buyer
Don’t expect the ideal strategic buyer to suddenly give you a call and make an offer. I recommend consulting with M&A professionals that will take a systematic approach to identifying and pursuing prospective strategic buyers.
First step is to identify the likely criteria that will offer strategic value, then look for viable buyers once these synergies have been outlined. Possible integration options include:
- Horizontal: Integrating horizontally allows a buyer to bring the acquired company’s solution to the market in which it is already currently focused.
- Vertical: Integrating vertically allows the buyer to bring the acquired company’s solution in house. Providing more operational and cost control over a key functional area that previously was provided through a third party contract.
- Capacity: The strategic buyer’s company may have unused capacity that can be filled with the acquired company’s product or service.
- Channel: The acquiring company has a sales channel that can easily take on the additional product or services of the target company.
- Geographic: The acquired company provides the strategic buyer with access to other geographic markets which it has not yet penetrated.
- Operational Efficiency: The buyer believes it will operate the new combined enterprise at a higher margin by eliminating redundancies.
- Market Pressure: The strategic buyer realizes that in the competitive marketplace, it does not have time to develop the buyer’s product or service and must acquire it immediately to remain competitive.
Identifying the various integration options will allow your M&A professional to develop a target list of potential suitors for your business. By documenting these possible synergies in the offering memorandum and targeting key possible prospective buyers, your business intermediary seeks to generate competitive bidding for your company with the preferred result – the highest market valuation possible.
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Brad Elliott is Principal/Broker at VR Business Brokers in Ewing, NJ. Brad himself has owned, operated, and sold a multitude of small to mid-sized businesses over the last 15 years. Brad received his MBA from MIT’s Sloan School of Management and comes from a family of entrepreneurs.
