M&A Buyer Types and What To Know When Selling Your Business
To execute a high-multiple sale for any business, you need the right buyer. Finding that buyer is a challenge in any economy, but it has gotten more complex during the pandemic. The right buyer can help you achieve the goals you have for an exit by maximizing value and ensuring the best interests of the business are carried forward.
Today, more businesses are receiving unsolicited offers from potential acquirers with money they need to put to work. While this might seem to be an ideal scenario, it is still important to complete your due diligence.
At the highest level, a strategic buyer wants to make a purchase based on its long-term strategic value. The purchase is usually intended to improve an operating company: enhance its capabilities, expand its customer base, or extend its service offerings. Most strategic buyers are corporate buyers, but private equity (PE) buyers with a robust acquisition arm or corporate development group can act like a strategic buyer, too.
A strategic buyer generally has the advantage of deeper industry understanding. They know what their acquisition targets do and how they do it. That can be beneficial because they have clarity on what it will take for a company to succeed. It can also be a detriment because of preconceived notions about the company, its direction, or the overall trajectory of the market.
Experienced strategic buyers generally have internal frameworks and processes that accelerate funding and execution of deals. Capabilities may include legal, financial, and outside consulting relationships. Newer strategic buyers may be more reluctant to invest in these resources, with a corresponding impact on clarity in the early stages, and potentially a longer timeframe for an agreement.
A PE-backed strategic buyer is capable of moving with the speed of a private equity firm, but can also pay for the strategic value of a company, enabling them to leverage the synergies of the acquisition.
A financial buyer is a group that wants to make an acquisition for investment purposes. The goal is to grow the acquisition and sell it over a defined period of time. While private equity firms are well-known as financial buyers, there are many other types. Independent sponsors, search funds, and family offices can all be financial buyers. This adds significant nuance to sellers’ relationships with these buyers.
Here is what to know about the types of financial buyer:
Not all private equity firms are rightly considered financial buyers. For example, some private equity firms have investment periods of 30 years or more and develop no immediate exit plan. Others are highly focused on specific industries, end markets, size ranges, and investment horizons. Approaching a PE firm means knowing its investment thesis and how that might comport with your goals as a seller.
A search fund is an investment vehicle that puts capital aside for an individual to seek a relatively short-term investment of two years or so. Generally, participants are recent business school graduates looking for a company to buy. The search fund pays them a salary plus expenses for them to identify and purchase a business. The committed capital from the search fund finances the deal.
An independent sponsor is an individual who is seeking opportunities. Once the right opportunity has been identified, the sponsor will partner with a private equity firm or a mezzanine debt provider to help finance the acquisition. The timeline for an independent sponsor tends to be far longer than for private equity, because they must raise capital and perform due diligence at the same time.
Family offices are typically associated with successful businesses. They have taken a part of their existing wealth and dedicated it to investment in privately held companies. That may be intended to diversify the family holdings or to provide opportunities for the up-and-coming next generation.
Family offices tend to take a long-term view and have a much lower volume of deals than a PE firm. However, more family offices are bringing talent into their organization to maintain the high standards associated with PE while still delivering on a longer investment horizon than most PE firms.
As a general rule:
- Private equity firms have a lot of capital to deploy and are being aggressive in their valuations
- Private equity firms and corporate strategics with robust corporate development move fastest
To maximize value, it is critical to look beyond “the usual suspects.” No matter who you initially expect your buyer to be, seek out groups that are more opportunistic and able to find value in the specific attributes of your business. That gives you the opportunity for the most lucrative outcome.