Know Your Buyer: Strategic Versus Financial

Are you looking to attract financial or strategic buyers? Which would be better for your business? Understanding the key differences will help you make the right decision. “If you're a seller you want to know whether or not you are trying to angle your sale to a financial purchaser or a strategic buyer,” says Bob Mohan, whose transaction experience over the past 18 years includes 11 years with Google in the US where he managed a 15-member M&A finance team. “The seller needs to know what assets are being sought, and how to market those, and perhaps how to downplay the other portions of the business,” adds Mohan, who has dealt mostly with strategic acquisitions in the tech sector.

Strategic buyers

These buyers are often operating competing businesses, are your customers, or your suppliers, and are looking to expand their business and increase market share. They can also be from an unrelated industry and looking to diversify their revenue. They typically pay more for businesses than financial buyers and are looking to increase shareholder value over the longer term. “The strategic buyer is looking for something specific within a business, typically not the entire business,” says Mohan, who led the effort at Google for 130 acquisitions and strategic investments, including that of YouTube, DoubleClick, Android and Maps. “Or they’re often looking at integrating, or adding a component to an existing business, bolting something on that's strategic to what they're trying to do.” Mohan, whose more than 20 years in tech firms in Silicon Valley and Sydney has given him unique insight into strategic acquisitions, says there may be an element of a supply chain that is attractive to a strategic buyer, or an attraction in terms of a distribution chain. Other examples of what strategic buyers are attracted to in a seller can be a piece of technology, intellectual property, a trade name, a customer list or an assembled workforce.

Acquihires

Acquihires, or the act of acquiring a company primarily for the skills and expertise of its staff rather than its products or services, are commonplace in the tech industry and among start-ups. These are very strategic buyers, says Mohan. “Sometimes, financial buyers can wear the skin of a strategic buyer, to buy something for say, a private equity portfolio,” he adds. There are potential benefits and risks of selling your business to a strategic buyer:

Benefits

• Often willing to pay more for a business because it’s based on strategic value, rather than just finances
• Their purchase can create operational efficiencies for both businesses, once combined

Risks

• A merger of your business and theirs may not go smoothly
• Jobs under threat
• Customer and employee loyalty can suffer
• If the deal falls apart, the acquirer may walk away with valuable strategic information.

If you’ve got strategic buyers interested in your company, then it’s important to realise that some portions of your business are going to be more of a liability than an asset. “Often times, the intended purpose or asset that's being looked at is really the focus, and so the technology and the team associated with that would really be prioritised, and the rest of the business might be a bit of a formality on how do we move that on, or divest that, or just put that on mothballs and shut it down,” explains Mohan. “So essentially, from a strategic selling standpoint, you would want to know who to market your effort towards, and how to market your story specifically to that type of buyer,” he adds. In addition, strategic buyers are often times less organized and less scientific in their approach to valuation, which can be a little haphazard, according to Mohan. Their legal representation may also be less intense than that representing a financial buyer.

Financial buyers

Private equity, venture capitalists and hedge funds are financial buyers, as are high-net worth individuals. Typically, they’re looking at a company’s growth potential and are usually motivated by financial return rather than synergistic opportunities. They often buy in with the aim of making a return in a few years from an eventual sale or public listing.

Benefits

• May offer less up front than strategic buyers but bring potential for additional later returns
• Can offer the opportunity for you to stay involved
• The deal process will likely have less impact on employee morale and operations as normally not buying to split 

Risks

• Will generally offer less upfront than strategic buyers
• Often have to raise funds to finance the purchase so process may take longer
• Due diligence is usually more thorough and intense
• Usually requires the commitment of the CEO/owner at least for an initial period 

Manna from heaven

There’s another type of business buyer that all owners would love to engage with. They’re called “manna from heaven” buyers and you’re really very unlikely to ever come across them, apart from in stories from deals done in the tech sector.

“For the person that sells to them, it's marvellous, because they pay absurd amounts of money,” says Clark Butler, a Sydney-based lawyer, corporate advisor and investor with more than 20 years’ experience. “For everyone else, it's a nightmare.” Butler says he advised a client in 2015 whose US competitor had just been snapped up by Amazon for about 250 times earnings. His client was asking what his company was worth, to which Butler replied: “probably not 250 times earnings!” Amazon’s manna from heaven purchase resulted in them delivering packages by drone within a short period of time, and so clearly, the strategic value of their purchase was a valuable one and made sense for them, explains Butler. “But manna from heaven buyers generally don't drop in your lap,” he adds. “And if your seller thinks that’s going to happen, then you're not going to get a transaction done.”

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