Buyer: Financial or Strategic

Potential buyers of an operating business fall into one of two categories: Financial or Strategic.

Financial buyers are defined as those buyers who are strictly looking into acquiring a business as a good opportunity for an investment that is likely to increase in value. Unless a financial buyer has previously or is currently invested in a similar line of business each business stands on its opportunity to deliver a favorable return on their investment. So as a consequence each investment opportunity competes with the other such opportunities.

Strategic buyers are defined as those buyers who are already in the same line of business. This could be a direct competitor; a business that wants to expand its product offering by adding new related products; or a business operating in another trade area that wants to expand geographically.  While logically it makes sense that such a buyer would be willing and justified to pay more for the acquired company because of the economies of scale, often this is not the case when comparing their price to those of financial buyers. This can be attributed to strategic buyers inexperience in valuing a business, something a financial buyer does continually.

There is also often a stark difference in the owner’s post-sale involvement. In the case of a financial buyer it is most often a requirement that the seller who manages the business continue to run the business for a period of time after the sale in order for continuity and because the buyer is not well versed in this type of business. Conversely, when the buyer is a strategic buyer the newly acquired business can incorporate the efficiencies of a similar business by eliminating management duplication, thereby increasing the overall profit of the combined businesses. So, when The Montana Group (www.montanagroup.com) is the consultant for the sale of a business we need to know the owner’s preference as to their involvement after their business is sold, which affects our selection of potential buyers.

Now that private corporate earnings are trending upward, a focus on selling a business is certainly more prudent. Particularly so, when well-funded buyers are numerous, the interest rates for acquisition debt is historically very low, and the recent economic improvement makes the business’ future appear brighter. In conclusion, “If your business is performing well financially and the business is making at least $2 million in pretax this is a great time to consider selling for there is pent-up demand from the buyside and the availability of companies to invest in is still lower than normal” says consultant Emmett Barnes, President of The Montana Group (www.montanagroup.com).