What is a Strategic Buyer? – Guide to Financial Sponsors vs. Strategic Business Buyers

When you are selling your business, not all types of buyers will look at your company with the same objectives. Some buyers – for instance, PE firms – acquire companies with a focus on maintaining and then increasing their cash flow. This can be done through various growth initiatives, cost-cutting, further acquisition, financial engineering, or a litany of other value-added processes. 

These firms look for profit opportunities that can be derived by acquiring companies that are in growing industries, have strong teams in place, and have shown consistent profit.

Then some businesses are looking for targets to derive synergies, consolidate market competition, and improve or expand their offerings.  They are more interested in how well the target company will fit in with its existing operations than in how much cash it is producing through its current operations. 

This post talks about this second type of buyer called strategic buyers. 

The Definition of a Strategic Buyer

Strategic buyers could be competitors, suppliers, customers, or any other investor who could have a strategic or synergistic interest in your company. 

A strategic buyer can be a public or private firm having a synergistic interest in a business. They also have a vantage understanding of the value drivers in your business as they come from the same industry.  

Regardless of the type of strategic buyer, it’s looking for strategic fit above everything else. For instance, an established company in the food & beverages industry can buy a company from the organic food segment to augment its portfolio or outcompete rivals. In this case, they may be looking to utilize their strong relationships with supermarket chains to increase the distribution of the acquired brand, which would add value to it.

Many strategic buyers come from the same industry as yours. They have an idea of the ins and outs of the industry which can help in faster decision making and deal execution. 

What is the Difference between a Financial Buyer and a Strategic Buyer?

Financial buyers – also called financial sponsors – are typically private equity l firms that acquire companies as investment opportunities regardless if they have a synergistic interest or track record in that industry (as opposed to a strategic buyer’s synergistic or strategic objectives). 

Financial buyers will also typically acquire companies with an exit date in mind. They are looking to acquire and grow businesses to sell them at a much higher price to achieve a substantial financial return from their investment. 

On the other hand, a strategic buyer is more interested in how the acquired company is going to contribute to its overall corporate strategy. 

Therefore, strategic buyers have a more comprehensive list of considerations – in addition to investment potential – such as strategic fit, synergy, value drivers, and how the acquisition would help in deriving a competitive edge. However, note that some strategic buyers may be backed by PE firms. 

Types of Strategic Buyers

Strategic buyers are of 3 broad types: horizontal, vertical, and conglomerate. 

1. Horizontal strategic buyers 

Horizontal strategic buyers are on the lookout for companies within the same industry but offer an adjacent product or service.

For example, a manufacturer of brake pads may be interested in buying a manufacturer of automotive glass. They are both manufacturers in the same industry but offer different products.

2. Vertical strategic buyers 

Vertical strategic buyers are interested in upstream or downstream companies in the supply chain. 

For instance, a manufacturer of brake pads may buy a brake pad distribution business (downstream) or a rubber manufacturing plant (upstream) to have better control over the supply chain and increase their profit margin.

3. Aggregate strategic buyers 

Aggregate acquisitions seek to buy high-potential companies in different industries that share some function with their existing business that allows the acquirer to save costs

For example, consumer product companies are often bought by aggregators who bring all of the R&D, product sourcing, and marketing in-house under the parent company to save costs and streamline operations.

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If you are entertaining the idea of selling your business and wondering how long it might take, here is our post to help you wrap your head around the timeline: How Long Does It Take To Sell A Business.

Why Sell to a Strategic Buyer?

The main advantage of selling your business to a strategic buyer is that they are more likely to have a better understanding of the intricacies of your business since they operate in the same industry. 

Additionally, here are some other advantages of selling to a strategic buyer:

  • Higher value: Financial buyers have a targeted internal rate of return (IRR) because of which they find it difficult to justify a high purchase price. However, strategic buyers may be willing to pay a premium price looking at the cost-saving advantages and synergies to be derived by acquiring your business. 

 

  • Higher success rate: Since a strategic buyer is well-acquainted with the industry you operate and the business models within the industry, there are going to be fewer surprises, if any. This means there is a greater chance for the deal to go through in comparison to deals in which a financial buyer is involved. 

 

  • Faster deal execution: In-depth industry knowledge is going to help strategy buyers make faster decisions and due diligence. This will help you sell your business within a shorter period. However, this does not mean a strategic buyer is not going to scrutinize all areas of your business and documentation. It’s just that operating in the same industry is going to help them carry out each step in less time. 

Why do Strategic Buyers Pay More?​

Strategic buyers may be willing to pay a premium price for your business as they are more interested in the strategic fit and synergy – not just short-term financial return.

They can make the target company more profitable by leveraging operational synergies. This enables them, in comparison to financial sponsors, to bid a high price for your business.   

Therefore, they look at the larger picture in which the acquisition can help the larger company derive long-term value and profitability. It’s this long-term potential that helps a strategic buyer justify a higher purchase price. 

In comparison, financial buyers have a nearer-term view while buying a business, do not have all of the operational synergies that a strategic buyer has, and therefore won’t be able to bid as aggressively as some strategies.

How to Find Strategic Buyers?

The best way to get connected with a strategic buyer is to sell your business through a broker or M&A advisor who knows how to run an auction process which will include bids from strategic and financial buyers.

An experienced business broker or M&A advisor like Raincatcher has a comprehensive list of strategic buyers from different industries and a record of selling businesses to them.

It’s their networking capabilities and business relationships that enable them to market your business to their list of strategic buyers. For instance, at Raincatcher we target strategic buyers in the auction process to solicit multiple bids and maximize the deal price. 

Raincatcher is an Inc. 5000 M&A advisor and business broker. We work with business owners with $2M+ in annual revenue to exit for the best price and terms. 

Our buyer list is comprehensive and will be tailored to include (or exclude) participants in your industry who may make great strategic buyers or who you want to avoid knowing the business is on the market. 

Contact us today for a consultation and explore how we can help you unlock the full potential of your business.