One of the first questions any business owner considering a sale needs to answer is whether to pursue a strategic buyer or a financial buyer. Each category of acquirer has fundamentally different motivations for buying, has different criteria for what they’re looking for and will have a different impact on the acquired business if the deal does close.
If you’re a business owner, understanding the difference between the two is crucial in determining which type of buyer is the right fit for your company, and whether or not more work is needed before you put your company up for sale.
How strategic and financial buyers differ
Strategic Buyers
A strategic buyer is a competitor or complementary organization that would add your business to its existing operations. They’re interested in your business because you have something specific that might benefit them, such as your employees, your products or your market footprint.
Strategic buyers bring money to a transaction, but they might bring other things as well, such as business administration skills or a fully built infrastructure. Any gaps your business might have, such as a weak sales process or a concentrated customer base, might be solved by folding your operations into those of the buyer. A business that sells to a strategic buyer is much less likely to remain intact.
Financial Buyers
A financial buyer is a professional investor or an investment fund, which could include a family office, a Small Business Investment Company (SBIC) fund or a private equity fund. They’re not in your industry and view your business as part of a portfolio of investments.
Other than money, financial buyers bring very little to a transaction. They’re only interested in businesses that can already run themselves without the involvement of the owner. With these transactions, the only material change is in management, not operations.
Hybrid
There is a third hybrid category in which the buyer is an executive who has backing from a financial buyer. In these cases, the executive often has an industry background that makes them a strong fit for the role.
Deciding the right type of buyer for your business
Many business owners dream of selling their business to a private equity fund. For most privately held enterprises, though, the honest truth is that if the business can’t run without the involvement of the owner, a strategic buyer is the only practical option.
Strategic buyers are also a more natural fit for:
- Small and early-stage businesses,
- Businesses where the management team is not fully built out, and
- Businesses with concentrated customer or supplier risk.
Financial buyers are a more natural fit for:
- Businesses above a certain size ($30 million of revenue is a realistic threshold) with a complete management team staying in place,
- Businesses where the owner and operator have been separated as distinct roles,
- Businesses that don’t have unusual supplier or customer risk, and
- Businesses with all the management functions of a strong standalone organization.
Building toward a financial buyer transaction
Entrepreneurs trying to scale from a startup to a financial buyer-ready business should expect to spend a decade or more in focused pursuit of that goal. Along the way, peer organizations like YPO and Vistage can provide helpful advice, mentoring and introductions from fellow CEOs and business leaders who have faced similar challenges.
Another practical step for business owners aspiring to sell to a financial buyer is to talk to investment funds long before they’re ready to sell, asking them directly what it would take for a business to be an attractive investment to them. Their responses might not be surprising, though this direct feedback from investors can provide an unambiguous roadmap for a business.
There are other important considerations for business owners preparing to sell, but those have less to do with the category of buyer and more with the qualities of each specific partner. You can have a good or bad financial buyer, or a good or bad strategic buyer.
More often than not, the owners who achieve the best sales outcomes are the ones who understand their business clearly, know what type of buyer is realistic and give themselves enough time to close any gaps. The earlier that process starts, the more options you’ll have when the time comes.