Is a Financial Buyer or a Strategic Buyer Better?

If you decide to sell your business to an outside acquirer, you’re going to have to decide between a financial buyer or a strategic buyer.

Which is better? Both have their pros and cons. Ultimately, though, it depends on your specific situation. Here’s a look at some of the factors you’ll need to consider when making your decision.

The Difference

A financial buyer is acquiring your future profit stream. So they will evaluate your business based on how much profit it is likely to make and how reliable that profit stream is likely to be. The more profit you can convince them your company will produce, the more they will pay for your business.

But there is a limit to how much they will pay.

Financial buyers are playing the buy-low, sell-high game. So, they do not have a strategic rationale for buying your business. They also don’t have an army of sales reps to sell your product or a network of retailers where your product could be merchandised.

They’re 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. Their goal is to buy your business on the cheap with the hope of flipping it five or ten years down the road.

Because financial buyers are usually investors and not operators, they want you and your team to stick around. As such, they rarely buy all of a business. Instead, they buy a chunk and ask you to hold on to a tranche of equity. That way they keep you committed.

A strategic buyer is a much different animal. Usually a larger company in your industry, they are evaluating your business based on what it is worth in their hands. 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.

Fast Growing Software Company Looks For An Acquirer

Tom Franceski and his two partners had built DocStar up to 45 employees when they decided to shop the business to private equity investors. The PE guys offered four to six times earnings before interest, taxes, depreciation and amortization (“EBITDA). But, Franceski thought the offer was too low for a fast-growing software company.

Franceski was then approached by a strategic acquirer called Epicor. As a global software business, Epicor had a lot of customers who could use what DocStar had built. Epicor offered Franceski around two times revenue—a much fatter multiple than the PE firms were offering.