Strategic Buyers – Who are they and why do they matter?

Who is a Strategic Buyer?

Strategic Buyers are other companies that could have an interest in acquiring your business.

The reasons these buyers are important are:

• There are economic synergies that can be realized through combined purchasing power and the elimination of duplicate operational functions.
• They are larger companies with better access to capital that can potentially offer stock in addition to cash at closing.

Companies in this group are existing businesses that may be interested in acquiring your business for purposes of:

• Vertical expansion – adding products and services to their customer base.
• Horizontal expansion – expanding the customer base for their products and services.
• Eliminating competition – removing choices of products or services for their customers and potential customers.
• Enhancing weakness in their company – acquiring technology, marketing, distribution, research, and development.

In addition, because these companies have existing business operations, there can be cost savings since many of the necessary functions are already in place: they have a facility, office, and departments such as finance, IT, HR. With the ability to combine these factors, they are often willing to pay a higher multiple and a higher valuation.

Potential Strategic Buyers for Your Business

Here is a list of 5 groups that should be considered as potential strategic buyers:

• Competitors – You know who they are because you have been competing with them for years. Perhaps they have even approached you in the past about the potential for a merger.
• Companies like you in different geographic markets – If your customer base is limited to a specific market, perhaps there are companies offering similar products or services that would like to expand into your geographical market.
• Neighboring industries – Perhaps there are companies selling different products or services to the same clients that would like to add your product or services to be able to cross-sell or up-sell.
• Consolidators / aggregators / highly acquisitive companies in the same industry – In many industries where service providers are highly localized and fragmented, there are large consolidators that are buying smaller companies on a regional or national basis.
• Top client – One of your major clients could be interested in acquiring you because they are very dependent on your product or service and want to be able to control its use and eliminate potential competitors of theirs from having access to it.

It is critical to create a list of strategic buyers and to include as many companies as possible. Try not to have any preconceived notions as to who may or may not be interested. Don’t be afraid to approach a competitor, even if you don’t want them to know you may be selling. There are non-disclosure agreements and redacted information you can use to protect yourself.

Consider Your Options

Is a strategic buyer always the best fit? Not always. Consider the following scenarios:

• Seller wants the highest price – A competitive process with several strategic buyers involved is probably the best way to achieve this outcome.
• Seller wants high price but also wants to protect all employees – A strategic buyer is probably not the best option in this case. Part of the premium a strategic buyer will pay for is the cost savings in duplicate job functions through headcount reduction.
• Seller wants to totally or partially cash out but still remain involved for a period of time – There are situations when the owner may want to sell a portion of the business but stay involved. This could occur because they realize they need additional resources and capital to take the business to the next level. With the right strategic partner, you may be able to sell while being involved in future growth and financial gains.