Financial vs. Strategic Buyers: Which Are Better for Your Business?

When you make the decision to sell a business, you know you’re looking for a buyer—but what kind? Understanding the differences and benefits of the two main types, financial and strategic buyers, is key to making the right decision for your company.

Strategic Buyers

According to Pepperdine University’s 2016 Private Capital Markets Report, 57 percent of closed business sales transactions in 2015 involved strategic buyers.

This might be because strategic buyers pay more for businesses than financial buyers. In Pepperdine’s research, 50% of respondents found strategic buyers to pay a premium between 1% and 20%.

These buyers are operating companies, often competitors, customers, or suppliers of your firm looking to increase market share. Alternatively, they might be from an unrelated industry but looking to diversify revenue streams. Before buying, these buyers look intently at companies to determine if their services or products can be incorporated into the current structure of their business to create value for their shareholders in the long term.

Pros

We’ve already mentioned that strategic buyers are often willing to pay top dollar for an acquisition, but there are other pros. According to work done by PwC, strategic buyers can enable the entrepreneur to walk away completely and get the most liquidity, may be able to use their industry knowledge to lead to a faster close, and create operational synergies can improve efficiency.

Cons

Still, strategic buyers may not be the best fit. The merger of the two businesses can lead to a lot of role duplication, especially at the management level. As a result, management can lose their jobs or become subordinates. Customer and employee loyalty to the brand may wane—for employees especially, the changes may worsen company culture and resolve. Beyond that, it’s worth considering what may happen if the deal falls through with a strategic buyer. They may now have strategic information that could negatively affect your company in the future.

Financial Buyers

The most prominent example of this kind of buyer is private equity firms, but financial buyers also include venture capital and hedge funds, family offices, and ultrahigh net worth individuals. These buyers generally aren’t particularly interested in synergistic opportunities; rather they make investments with the long-term goal of reaping returns in the event of an eventual sale or IPO. They work to identify companies with impressive future growth potential and strong competitive advantages.

Pros

Financial buyers generally aren’t willing to pay as much as strategic buyers upfront, but they bring other benefits to the table. The lower initial valuation may perhaps provide you with the opportunity to later realize additional returns. If you’re looking to stay involved with the operations of the business, financial buyers will likely afford you that opportunity. In general, your business isn’t disrupted as much, mitigating the effects on customer and employee morale. As a final note, building a relationship with financial buyers can help you out in the future: access to funding is always valuable.

Cons

Financial buyers generally use debt to finance up to three-fourths of your company’s purchase price. A debt load this large limits financial flexibility and narrows your margin of error. Deals take longer to close and due diligence is often much more extensive because of lender participation. Financial reporting to investors comes with a lot of detailed requirements. If you want to personally step away from working from your company, this isn’t the best choice—you may be able to pull back eventually, but in the short term your involvement is almost absolutely required.

Selecting the right kind of buyer requires knowing exactly what you want from an ideal sale before you sell your business. Going to into the transaction process with clear expectations will help you discern which kind of buyer is right for you.