Potential buyers usually fall into one of two categories: The Financial Buyer and The Strategic Buyer. When you understand the differences between them, you’re better able to position your business to attract the best type of buyer for your situation.
The Strategic Buyer is likely to be one of your competitors, suppliers or even a long-time customer. They’re looking to buy businesses they can integrate with their own to expand their product or service offering or to access a new market.
Since they deeply understand your industry, including current trends, they tend to spend their time analyzing and evaluating how well your business will integrate with their own company. A top priority for this type of buyer is to determine if your products or services will appeal to their existing customer base. At the same time, they will analyze the various ways your customer base can provide a new market segment for them. They also look at the likelihood of one of their competitors being interested in buying your business.
Strategic Buyers are not usually interested in the strength of your management infrastructure or the efficiency of your office operations. Why? Because most of these functions will be absorbed by their own company after the acquisition. And since they intend to integrate your company into their own, they’re not concerned about selling your business down the road to recoup their investment and turn a profit.
The Financial Buyer has far different priorities. This type of buyer usually includes private equity firms or venture capital firms that make investments in companies to eventually give a healthy return.
Unlike the Strategic Buyer who is deeply familiar with your industry, Financial Buyers spend time identifying whether or not your industry is poised for future growth over the next five or more years. They also look at your company’s position within the industry and analyze whether or not it can provide a competitive advantage over time.
Since they’re not integrating your company with another, they’re far more interested in the business’ future profitability, and the skills of the existing staff they’ll need to run it. During the due diligence stage, they’ll conduct an extensive evaluation of your management infrastructure, back-office operations, and the strengths of your employees.
They will closely analyze your business’ debt, cash flow, and its capacity for increased earnings over the next few years. The longer they have to wait to receive a profit on their investment, the lower they’ll drop the amount of their offer. Or, they may not make an offer at all.
Keep in mind, a talented business broker fully understands the differences between Strategic and Financial Buyers. This enables him or her to effectively market to the type of buyer who will be most interested in purchasing your business.
