If you decide to sell your business to an outside acquirer, you’re going to have to decide between a financial and a strategic buyer—understanding the different motivations of these two buyers can be the key to getting the best price for your business.
Financial buyers are mostly considered to be investors who are interested in acquiring your future earnings stream. They are willing to invest in almost any type of business or any industry as long as the company is generating a cash flow stream that is attractive to them. 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.
They will value your business based on the amount of earnings it is likely to make and how reliable that earnings stream is. The buyer will be willing to pay more for your company if you can show them a consistently high earnings stream.
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 and they are simply trying to get a return on their investors’ money. 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 inexpensively as possible with the hope of flipping it five or ten years down the road.
A strategic buyer is usually a larger company in your industry and they are valuing your business based on what it is worth in their hands. They are wanting to acquire your company to either expand horizontally or vertically, to eliminate the competition, or to acquire some intellectual property. 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.
Choosing the right buyer for your company depends on what you want out of the sale. Do you want to retain some control in the company? Do you completely want out and are looking for the highest price? The Anders Business Transition Planning Team can help you decide what type of buyer is best for you. Contact an Anders advisor to discuss your options.All Insights