Mergers and acquisitions (M&A) transactions can be intricate, involving multiple parties with diverse goals and motivations. Understanding the different types of buyers participating in these transactions is crucial for making informed decisions and maximising value when deciding to sell your business. In this article, we will be discussing the three main potential buyers of businesses:
1. Financial Buyers
2. Strategic Buyers
3. Individual Buyers
Financial Buyers
A financial buyer in M&A is an acquirer who purchases a company primarily as a financial investment, aiming to achieve a specific return rather than synergies. Financial buyers are typically investors, such as private equity (PE) firms, which engage in leveraged buyouts. These firms invest on behalf of their fund’s limited partners, providing capital to generate positive returns.
Leveraged buyouts involve funding a significant portion of the purchase price with debt. This approach allows for cheaper financing and higher returns on investment because leveraging amplifies the returns on equity. If the acquired company performs well, the returns on the smaller equity portion are higher due to the debt amplifying the profits.
What This Means for Your Business:
If you are looking to sell your business to financial buyers, it is important to understand that PE firms usually focus more on financial returns above their targeted Internal Rate of Returns threshold; therefore, strong financials are incredibly attractive to them. They also typically have potential exit strategies planned for the near term at the time of purchase. For this reason, they:
Diverse Industry Interests: Financial buyers do not necessarily focus on a specific industry and may invest in various sectors such as healthcare and technology.
Growth Potential: They primarily invest in businesses that showcase significant growth potential and stable cash flows without much incentive for synergies, which may lead to lower multiples than strategic buyers.
Management Team Retention: PE firms usually try to maintain the existing management team through equity incentives, which will require them to run the company until another exit.
Exit Strategies: These firms often sell the company for a profit through IPOs, sales to strategic buyers, or sales to other financial buyers.
Strategic Buyers
Strategic buyers seek to acquire businesses that align with their current operations, enabling them to expand and increase their market share in targeted areas. They typically are:
Horizontal Integrators: Companies in the same industry looking to consolidate market share.
Vertical Integrators: Companies seeking upwards or downwards-oriented businesses in their supply chain.
Market Leaders: Companies aiming to consolidate or gain market share.
Strategic buyers not only look for return on investment but also synergies that can be fully integrated into their business model and companies that can be maintained as part of their business for the long term.
Types of Synergies:
Cost Synergies: Savings in operating costs post-M&A.
Sales Synergies: Revenue drivers post-M&A.
Financial Synergies: Financial improvements post-M&A.
Types of Strategic Rationale:
There are also strategic rationales that justify a higher premium on the valuation of a prospective M&A target. For example:
Attractive Technology: Inorganic growth via the acquisition of technology post-M&A.
Exclusive Patents: Expanding operations in exclusive areas previously unattainable.
Geographic Expansion: Expanding client base and location.
Market Position: Acquiring competitors or complementary businesses to grow market position and gain pricing power.
What This Means for Your Business:
Potentially Higher Valuations: Strategic buyers often pay higher control premiums and multiples due to potential synergies. They are keenly aware of the companies that can help them capture synergies and create long-term value.
However, If maintaining your independence or fulfilling a unique vision is important, strategic buyers may not be ideal:
Cost-Cutting Measures: Potential elimination of business lines and headcount to quickly enhance profit margins.
New Strategies and Objectives: Strategic buyers may introduce changes that alter the direction of your business.
Integration Challenges: Potential difficulties with technology integration and cultural fit between the two companies.
Individual Buyers
Individual buyers are typically high-net-worth individuals or small teams looking to acquire and operate a business for the long term. They purchase a minority of businesses and generally much smaller businesses compared to financial or strategic buyers. Their goal is often to become business owners without starting from scratch and to generate a long-term income stream.
What This Means for Your Business:
Opportunity to Exit: Individual buyers offer the opportunity for the current owner to leave, unlike PE firms that may incentivise the owner to stay.
Legacy Preservation: They are less likely to implement strategic changes that deviate from the original operations, preserving the business legacy.
Simpler Business Models: Individual buyers look for businesses with great financial projections and simpler business models to ensure successful and easy-to-resume operations post-transaction.
Conclusion
Selling your business is a complex and significant stage in its lifecycle. It is important to consider the range of buyers available, even if they offer the highest selling price. Different buyers have varying acquisition incentives that can impact your business's valuation and future, such as cost-cutting initiatives and business restructurings. Understanding these dynamics will help you make a more informed decision and ensure the best outcome for your business.
Contact
If you would like to speak to one of our directors about the potential of selling your business, please get in touch to schedule a call.
We will always act transparently and share the realities of a business sale, allowing you to decide whether your business is really worth selling.
T: 02920 025 852