Within the merger and acquisition industry, three major types of business buyers exist: financial buyers, strategic buyers, and private equity firms. Due to drastically different goals, each of these buyers will approach an M&A deal in a unique manner. It is critical for sellers to identify the elements which each buyer seeks, in order to create synergy and maximum selling price throughout the M&A process. This article will focus on financial buyers as well as the advantages and disadvantages of selling a business to this type of buyer.
In simple terms, a financial buyer is one that purchases businesses with the intention of growing capital and or replacing an income stream often lost from working in corporate America. A financial buyer can be either a firm or a single person who invests in companies in hopes of gaining a return on their investment. Financial buyers seek out competitively priced businesses with high potential for growth and a livable wage after debt service. Frequently, the financial buyer will purchase a company that they can cultivate, and then sell the business to another buyer for a higher price while continuing to search for a more suitable business for themselves.
A financial buyer will focus less on how well they can work with the business owner and more on the cold facts, such as the company’s stand-alone value. For those looking to sell to a financial buyer, it is valuable for the business owner to possess a high amount of commercial goodwill while reducing personal goodwill. Eliminating excessive personal goodwill is essential to attracting financial buyers, because a company must operate effectively without its owner for it to be of value to a financial buyer. It is also advantageous for the seller to emphasize the quality of the company’s back-office infrastructure; a financial buyer will need to utilize this infrastructure, while a strategic buyer may already possess these services and eradicate them in the acquired business to take advantage of economies of scale.
Typically, a financial buyer will possess less ready capital than a strategic buyer, therefore requiring them to find better means of financing. However, because the financial buyer’s goal is to ultimately obtain a livable income stream from the M&A transaction, they will often desire a lower payout price than a strategic buyer.
Sellers must consider the circumstance that once the financial buyer purchases the business, they will often do what is financially savvy in order to grow the profits, even if the manner in which they operate does not coincide with the values of the previous owner.
The financial buyer is often a suitable target for the sale of startups, since startups are often known for their high growth potential. Oftentimes, owners of startup businesses are less emotionally attached to their business, so they are able to be less concerned about the direction of the business post-closing.
Sellers that are considering a financial buyer as their target should employ the help of an M&A intermediary in order to avoid possible obstacles that they may run into during deal making with a financial buyer. Please contact George & Company in complete confidence and we would be happy to help you get the most for your business, as well as place it in the right hands.