Understanding the nuances of strategic buyers can significantly impact the outcome of your company’s sale. Whether it’s confidentiality concerns, transaction forms, or employee impact, each buyer type brings unique considerations. Discover how to navigate these complexities and make informed decisions for your business.
Competitors, vendors, customers, or other buyers that perceive they can leverage the existing operations of an acquisition candidate in some other way, have historically been referred to as “strategic” buyers (rather than “financial” buyers). One key difference between a strategic buyer and a financial buyer is the degree to which they will pay a higher price than other buyers as a result of synergies or additional value that they can create by acquiring a specific target company.
While there are shared characteristics of financial and strategic buyers (i.e. strategic premiums in their valuations), financial buyers will generally assess buyout opportunities without incorporating the potentially higher premiums afforded by these synergies. Although selling to a strategic buyer may yield a somewhat higher valuation, a number of other factors may influence a seller’s decision regarding the type of buyer that best meets their overall set of objectives.
Process/Transaction Considerations
The process of engaging with a strategic buyer is essentially the same as pursuing a financial buyer. In fact, we often market the company to both types of buyers simultaneously. However, there are process considerations that can be somewhat different, including the following:
Confidentiality –While any buyer will be subject to a non-disclosure agreement, we often find that sellers that pursue a transaction with a strategic buyer are more concerned with confidentiality than with financial buyers. Whether they are competitors, vendors or suppliers, customers, or otherwise in the sellers’ “ecosystem”, providing the information required in the due diligence process can often be a sensitive topic. At the same time, sellers are often concerned that there is a higher likelihood that the potential sale of the company becomes known prematurely, and customers, employees, vendors and others find out before the seller can adequately inform their stakeholders on their terms.
While there are ways to mitigate this possibility, the risk of a breach of confidentiality is often higher with a strategic buyer. Irrespective of a potential breach, the need to provide a competitor, customer, or supplier with sensitive information is a consideration that must be dealt with thoughtfully and through a tight process.
Form of Transaction/Consideration – While the overall purchase price is often higher in a sale to a strategic buyer, the form of the consideration can be significantly different than in a sale to a financial buyer. Sometimes this can result in a better overall transaction for the seller, but sometimes it can involve additional risk which is a tradeoff an experienced advisor can help fully navigate.
Less well capitalized buyers will often ask the seller to carry a portion of the financing, or the purchase price may contain earn-out provisions that require certain milestones to be met to ultimately achieve a higher price. In transactions involving a publicly traded company, buyers will often ask the seller to accept some portion of the proceeds in the form of the stock of the buyer. This can also be the case with a private company buyer. The ability to hedge, and/or ultimately exit the position is a key consideration in assessing the overall economics and risk of the transaction.
In contrast, financial buyers will often require the seller to “roll” a portion of their proceeds back into the transaction to ensure that the sellers stay motivated to achieve the growth objectives of the company. While this can result in a “second bite at the apple”, and ultimately provide a more favorable outcome for the seller, it will generally result in lower proceeds at closing than in a sale to a strategic buyer.
While neither scenario is necessarily better or worse than the other, careful consideration, along with objective analysis, should be given to the implications of the form of the consideration, including both the risks and potential upside. Without a trusted advisor to assist them, this can be challenging for sellers when they are in the moment.
Employee Impact –The opportunities for continued growth, development, and overall well-being of employees can often appear to be greater with a strategic buyer than a financial buyer. While this is often the case, careful consideration should be given to this aspect of the transaction. It is entirely within the purview of a seller to ask the buyer to explain their rationale for the transaction, and to gain comfort as to what life after the transaction might look like for the employees.
While the opportunity set may well be greater for the workforce, the risk that some of the perceived synergies will result from cost savings, usually in the form of head count reductions, can be higher in a sale to a strategic buyer. All buyers are seeking efficiencies and productivity gains, but a frank discussion early in the process as to the buyer’s plans for the company’s employees should be undertaken to enable the seller to get comfortable.
Culture and Legacy –In addition to understanding what to expect as it relates to employees, most sellers are keenly interested in what is likely to happen to the culture of the company, and what legacy the seller will leave behind. While this issue may be somewhat less important to many sellers than the economic benefits, it is often a close second. Strategic buyers are often favored by sellers due to the perception (and often the reality), that the culture and legacy that the business has developed will be maintained post transaction. Again, depending on the buyer’s rationale for the transaction, and their high-level plans for the company post-transaction, the impact on culture and legacy is a key consideration for sellers in many transactions.
If you’re considering a sale of your company, or have been approached by a competitor, vendor, customer or financial buyer, it’s important to understand who these parties are, their unique goals and objectives, and the benefits and drawbacks of various “go to market” strategies. If you’ve been approached by a potential buyer, or just want to talk through your options, give us a call!