Next to the type of transaction, the type of Buyer is important to assess your sales strategy. A Buyer can be distinct in a strategic or financial Buyer.
A strategic Buyer is a corporate company active in a similar business. The objective of a strategic Buyer is either a vertical acquisition or horizontal acquisition.
A horizontal acquisition means the acquisition of a Company active in the same business. For example, a chocolate factory in Europe acquiring a chocolate factory in the US. The main objective is enlarging its customer base and growing its market share. Acquiring a competitor is a part of a horizontal acquisition.
A vertical acquisition has the objective to buy a Company which is active in the supply chain of the Buyer. For example, a factory acquiring its main raw material supplier. The main objective is securing the supply process and increasing profitability by eliminating the middle-person. The mentioned example is an example of a backward integration. The acquisition of a distributor or customer is called forward integration.
Strategic Buyers are very knowledgeable in the sector your business operates in. These type of Buyers focus their diligence on commercial (market share, customer, products), operational (suppliers, costs and what synergies can be realized). These type of Buyers generally wish to integrate your business into their own business.
A financial Buyer can be an investment fund or private equity firm (PE firm). This type of Buyer acquires companies with the objective of selling the Company again after 5 to 7 years (hopefully, against a higher value). The type of companies these Buyers are looking to acquire are companies with improvement potential or which could be easily added to existing companies already in their portfolio to maximize synergies (so-called buy-and-build strategy).
These type of Buyers require that the current owner or the current Management Team stays committed to the Company and generally acquire a majority but not 100% of the shares. PE firms have a bad reputation, being they only put large amounts of debt in the companies and have little added value. In fact, the opposite is true. Especially for start-ups PE firms can add huge value; not only in terms of additional funding which can be used for further growth, but also in the area of expertise. As the Investment Managers and Partners at PE firms often are entrepreneurs themselves and have significant experience in managing and growing companies. They can help you bring your Company to a next level.
Financial Buyers have less sector knowledge compared to a strategic Buyer. As such, financial Buyers are more likely to rely and engage external advisors to assist them in the due diligence process. Financial Buyers look from a financial perspective to understand the value of your business and whether the business can be sold again in 5 – 7 years against a higher price. Financial Buyers require that your business can be operated stand-alone without any integration with another business.
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