If you decide to sell your business to an outside acquirer, you’ll need to know the different motivations between a financial and a strategic buyer to get the best price for your business.
A financial buyer is acquiring your future profit stream, so they will evaluate your business based on how much profit it is likely to make and how reliable that profit stream is likely to be. The more profit you can convince them your company will produce, the more they will pay for your business.
But there is a limit to how much they will pay, because financial buyers are playing the buy-low, sell-high game. They do not have a strategic rationale for buying your business. They don’t have an army of sales reps to sell your product or a network of retailers where your product could be merchandised. They are simply trying to get a return on their investors’ money, so they tend to buy small and mid-sized businesses using a combination of this investment layered on top of a pile of debt, and they want to buy your business as cheaply as possible with the hope of flipping it five or ten years down the road.
Because financial buyers are usually investors and not operators, they want you and your team to stick around, so they rarely buy all of a business. Instead, they buy a chunk and ask you to hold on to a tranche of equity to keep you committed.
A strategic buyer is different—usually a larger company in your industry, they are evaluating your business based on what it is worth in their hands. They will try and estimate how much of their product or service they can sell if they added you into the mix. Because of their size, this can often lead to buyers who are willing and able to pay much more for your business.
When preparing for a financial buyer, financial performance is key, as well as, reliable financial reports and forecasts. The higher confidence the buyer has with the past and future financial performance of the company the better the valuation. Note: Most small business sales are to financial buyers.
When preparing for a strategic buyer, strategic fit is key, along with what the buyer believes they can do with your business in their hands. To attract a strategic buyer, owners should identify a prospects list of potential acquirers and align their business model in a way that would make their company an attractive addition to these potential buyers.