Knowing the differences between financial and strategic buyers can be critical in the sale of a business.

In selling a business, it’s critically important to know the motivations of a prospective buyer.  Often this boils down to determining whether the prospect is a financial or a strategic buyer.

Getting the sale of the business to the closing table is sometimes difficult, but the process can be facilitated if you’re able to successfully speak the language of either the financial or the strategic business buyer.

So let’s briefly examine each type.

The Financial Buyer

As the name suggests, the financial buyer will be looking most importantly at the financial returns that the acquisition might offer.

This type of buyer could be an individual, or in the larger transactions, a venture capitalist, a private equity group, a family office, or similar entities.

Financial buyers are seeking stand-alone businesses with cash-producing capability and the capacity for growth of bottom line profits.

Individual financial buyers are usually planning on making a career out of running the business.  In the larger acquisitions, the financial buyer may be focused on a five to seven-year plan in which they grow the company’s earnings and then sell the business at a significant profit.

The Strategic Buyer

This type of business buyer will usually be an operating company that is looking for synergies that the acquisition will bring to the operation.

For example, strategic buyers may be seeking opportunities for new product lines within the same industry, finding new geographical markets, or securing additional channels of distribution.

Strategic buyers focus a bit less than the financial buyer on the current earnings of the target company, but rather are more interested in the integration capabilities and the long-term possibilities for value creation that the acquisition will provide.

In Summary

Identifying the type of buyer and being able to speak to the differing motivations of each can be critical to smoothing out the sometimes difficult path to the closing table in the successful transition of a business.

In dealing with a financial buyer, be able to talk about profits and the possibilities of boosting earnings through increasing revenue and/or decreasing expenses.

When talking to strategic buyers, discuss product lines, customer base, geographic markets, and staffing expertise.

In short, know the difference and be able to talk the language or each.  That will go a long way!

Here are some other articles that might be of interest:

The Top 3 Issues Involved in Buying or Selling a Business

Selling a Business: The Critical Question of Price

What Are the Differences Between EBITDA and Seller’s Discretionary Earnings (SDE)?

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William Bruce is an Accredited Business Intermediary (ABI) and Senior Valuation Analyst (SVA) assisting buyers and sellers of privately held businesses in the transfer of ownership.  He currently serves as president of the American Business Brokers Association.  His practice includes consulting services nationally on issues of business valuation and transfer.   With offices in Fairhope, Alabama and Baton Rouge, Louisiana, he may be reached at (251) 990-5934 (Fairhope), 225-465-5799 (Baton Rouge) or by email at Will@WilliamBruce.org.