Good news: They often pay a premium for an acquisition, as much as 8X-10X EBITDA. They want to enhance their company by capturing market share, gaining access to new customers, obtaining technology and innovation, etc.
Bad news: They are slow-moving on an acquisition. They do not want the seller’s back office. Their intention is complete integration of the seller’s company into their existing business. They may pass on a company who appears difficult to integrate, regardless of the company’s market value.
Best Price: A sale to a strategic buyer will usually give you the best price for the company (Sell Your Business Your Way, p. 18).
Create Synergy: Strategic buyers look for companies that will create synergy with their existing businesses. Because strategic buyers may actually get more value out of an acquisition than the intrinsic value of the company being acquired, strategic buyers will usually be willing to pay a premium price in order to have the deal go through (Investopedia.com).
Motivations of the Strategic Buyer: Strategic buyers have different motivations and goals than other buyers. They often are more inclined to pay more for a business than other buyers because of their goals and objectives. According to the book, Middle Market M&A (pp. 28-29), some of these goals and objectives might be to:
- Expand into a new geography
- Capture market share
- Improve speed into the market
- Gain access to new customers
- Access technology and innovation
- Overcome IP (Intellectual Property) innovations
- Strengthen the pool of talent and capacities
- Complete or augment a product or service line
- Prevent a competitor from gaining market advantages
- Create an opportunistic buying opportunity
- Obtain other critical assets, such as contracts
- Create a competitive barrier to entry
Some differences between a strategic and financial buyer
Evaluation of your business
How your business will tie in with their existing business. Focused heavily on synergies and integration capacities
Evaluate the opportunity as a stand-alone entity. Often buy businesses partially with debt. They scrutinize the business’ capacity to generate cash-generating capabilities
Merits of the industry
Knows a lot about your industry, its competitive landscape and current trends
Is not as familiar with your industry. Will spend time on the macro view of your company and its industry. Will spend a lot of time on the risks of a given industry
Is not as interested in the back-office because these costs will be eliminated after the sale. The seller should not make this an important part of the sale
Needs your back-office infrastructure and will scrutinize it heavily during due diligence. The seller should make this an important part of the sale
Intends on owning an acquired business indefinitely, often fully integrating the company into their existing business
Plans on selling the business in four (4) to seven (7) years. See no value in buying a business for 8X EBITDA if they can only sell it for 6X EBITDA five years later. They are looking for a good ROI
Strategic investors may take a long time due to slow-moving boards of directors, bureaucratic committees, etc.
Financial buyers are in the business of making acquisitions. It is one of their core competencies to execute deals in a timely fashion