Strategic vs. Private Equity Buyers for Your Business

When the time comes to sell your business, you may be thinking of retiring in style or to fund your next venture. Regardless of the reason, the goal is the same: to maximize the selling price of your business. There are typically two main types of buyers that you will need to consider: Strategic or Private Equity (Financial).

Strategic buyers are companies in a similar, competing, or collaborative industry. They are buying a supply chain, distribution, intellectual property, a brand name, or another business function that will enhance their own business… or all of the above. Financial buyers are basically private equity firms that want free cash flow and profitability.

There are some key factors to consider when determining which category of buyer to pursue.

Purchase Price. Strategic buyers often place the highest value on your company, but private equity firms are strategic when they look for add-on acquisitions to their existing portfolio companies. This is not a “set-in-stone” rule by any means, but it is a well-established trend. While private equity firms are buying cash flow, strategic buyers get that same cash flow AND hope to achieve efficiency, expanded growth and/or added value with a merger.

Earn-out. With both buyer categories, a portion of the purchase price will likely be an earn-out. Either certain benchmarks must be met to get some of the money out of the deal, or that a portion of the money is tied as a percentage to revenue, profits or other metrics. In financial deals, the earn-out time period is usually shorter and is a smaller percentage of the total purchase price. Strategic deals often have a longer earn-out period (2 to 5 years is not uncommon), and the earn-out is often a larger percentage of the total deal value.

Financing. Strategic buyers — if they are big enough or have enough cash on their balance sheet — may not need bank financing. Private equity deals usually require bank financing which can add an extra step and possible hurdle in the sales process.

From a sale standpoint, it is wise not to limit your business and you should out to reach out to both types of buyers. This allows you to cast the widest net possible in order to identify the best buyer for you and your business.

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