BUSINESS TRANSITION PLANNING PART 4: Strategic and Financial Buyers

February 20, 2018 | Patrick McFarlen

In this series of articles, EKS&H Capital Advisors Partner Patrick McFarlen explores the personal and business considerations involved in a successful business transition. In this article, he compares financial and strategic buyers and helps you consider which is right for your unique preferences regarding the sale of your business.

Part 4: Strategic and Financial Buyers

Earlier posts presented family successions, management buyouts (MBOs), and employee stock option plans (ESOPs) as potential pathways for you to exit your business. However, those options might not meet your needs if you can’t find an internal buyer, don’t have family in the business, or simply want to explore the highest possible sale price.

In this case, you’re left with an important decision: Should you sell to a financial or strategic buyer? Each offers attributes that might align more or less closely with your goals, so let’s start by outlining each buyer type’s characteristics and motivations.

FINANCIAL VS. STRATEGIC BUYERS

Financial buyers typically don’t have previous investment in a company or industry but usually have worked in an industry for a significant time and so believe they have a deep expertise and/or knowledge in their target company or industry. They seek to enter an industry by purchasing a company that will serve as their “platform,” which they may build upon through strategic purchases or sell once they’ve further increased its value. Financial buyers include individual buyers, private equity groups (PEGs), and family office groups.

When financial buyers purchase a company, they often leave the business largely as-is because they want to grow the existing brand and infrastructure. This may appeal to you if you’re protective of your company’s legacy or want your leadership team and employees to retain their roles.

Strategic buyers are already in your industry or a related one and can be competitors or horizontal and vertical supply chain companies. They want to acquire or merge with your company to create synergies or expand their customer footprint. Their goals can include supplementing and diversifying their revenue streams and securing valuable intellectual property.

If you’re looking to maximize profits, strategic buyers may offer more opportunity to negotiate higher prices because they’re motivated by synergies and may have more financial wiggle room. Regarding your legacy, strategic buyers generally aim to integrate your company with their core business, which can involve changing business names, eliminating redundant employees, and making other alterations that could generate friction (this is a generalization and doesn’t apply to all strategic buyers).

The following EKS&H client story illustrates each buyer type:

We recently worked with a PEG that purchased a fire protection and sprinkler company. The PEG, having no prior experience in this industry, entered the industry by leveraging the existing successful business model and systems in its newly acquired platform. As a financial buyer, the PEG’s primary concerns were how much to spend on the acquisition and what to expect regarding return on investment (ROI) if they sell in 5-7 years.

Staying with the above example, the PEG’s acquisition enabled it to then act as a strategic buyer now that it had established an industry platform. We worked again with the client to purchase complementary companies that allowed for eliminating operational expenses and creating synergies.

PREPARING TO HIT THE MARKET

Whether you end up selling to a financial or strategic buyer, you need time to get your house in order before going to market. You want to assess and refine your company’s sales strategies and profitability plans, evaluate and address employee/talent challenges and opportunities, protect your intellectual property and consider technology assets and investments, and get your accounting and financial reports in tip-top shape (among others important tasks).

To start you thinking about your company’s buyout readiness, you may consider using our “five questions” model:

WHAT AND WHY:

  • Why are you going to market as opposed to working with internal buyers?
  • What type of involvement do you want with the company post-close?
  • Which of the two options (strategic vs. financial) better aligns with your goals and priorities?
  • Consider your financial requirements, legacy, and job security of current employees. 

WHO:

  • How do you want your executive team to be taken care of during the business transition? Potential incentives include a role in the post-sale company or share of transaction proceeds.
  • How will you develop your executive team before going to market, and how will you market the team to prospective buyers?
  • Should you setup an executive comp plan prior to going to market (SAR Plan, etc.)?

WHEN:

  • How much lead time do you have before wanting to sell based on your personal and professional circumstances? Go-to-market timelines can be as short as six months, but we recommend one to three years to implement a fully optimized go-to-market strategy. Once in market, transactions can be consummated between 6 months to a year.

HOW:

  • Should you approach a specific strategic buyer or does a limited-auction make more sense when compared to a full-auction process?
  • Do you prefer a cash buyout or will you accept company stock? This decision determines your liquidity following the transaction.
  • How will you identify the key members of your advisory team? You will need:
    • An accountant with deep experience in mergers and acquisitions (M&A) and estate planning.
    • A reputable investment banker.
    • A highly experienced M&A attorney.

By taking the time to determine what is most important to you during and after the buyout, you can identify which type of buyer you’d prefer. Whichever route you choose, your chances of successfully navigating your business transition greatly improve when you surround yourself with a trusted team of advisors possessing extensive M&A experience.

Back to News