If your business is doing over $1 million in earnings, you’ve likely been contacted by larger companies interested in acquiring your business. These are known as “strategic buyers.”
You may be asking yourself “Why are they interested?”
Strategic buyers are looking to grow and their goal is to gain synergies from acquiring other companies.
If they find your business to be a good fit, chances are, they will be able to offer you a higher price for your company than other buyers that do not already have other investments in the industry. This is because of the synergies they’re able to gain, which we’ll cover more later in this article.
To help you know what to consider before selling to a strategic buyer, we have compiled the top six things to think about before selling to one in this article.
Let’s jump in.
6 Things to Think About When Selling to a Strategic
While selling to a strategic buyer may be a very lucrative option, there may be some drawbacks depending on the buyer, your company, and your goals. To decide whether they are the right buyer for your company, you should consider all factors along with the price they offer.
MIDSTREET TIPA common misconception is that strategic buyers will always pay you the highest price for your business compared to individuals or private equity groups. Remember, the reason why the strategic is interested in your business is because they are looking to increase their earnings and will likely sell to an even larger group in a few years. Strategic buyers aren't that different from financial buyers (PEGs); they would still prefer to acquire your company for the lowest price they can, it's just that when they're in a competitive scenario with other interested buyers, they can afford to pay more.
1. Are They a Competitor?
If a strategic buyer is interested in acquiring your business, they could be one of four main types of strategics:
- In your industry
- In a related industry (supplier, vendor, etc.)
- In an unrelated industry
Before your broker even speaks to strategics about your company, you need to decide if you are comfortable divulging information to a competitor. We like to share any strategics that inquire with the client to make sure they’re comfortable sending confidential information assuming the buyer signs a Non-Disclosure Agreement.
Keep in mind, some competitors in your industry might try to fish for information by inquiring, but aren’t serious about a potential acquisition. It is your broker’s job to figure out if the buyer is truly interested or just fishing for information.
Let your broker know if there are any companies in particular that you don’t want to share information with.
MIDSTREET TIPPrivate equity companies will likely inquire about your company. Make sure your broker clarifies whether or not they are looking at this from a strategic perspective. In other words - do they own companies in the industry already?
A strategic may be interested in your business because they are expanding vertically or horizontally. If they are looking to grow horizontally, they are aiming to increase their reach within the industry. If they want to grow vertically, they are looking for ways to cover more aspects of their production or service.
2. Is The Strategic Buyer Backed By a PEG?
If the strategic is owned by a private equity group (PEG), they will be more sophisticated, have a team performing due diligence, and will have an accounting firm perform a QoE (quality of earnings).
The leadership teams for both the strategic (platform) company and the PEG will work together to determine if your business is a good fit for them. They will probably try to sell to an even larger company in the next few years and will be focused on providing a return for their investors.
If you’re dealing with a strategic not owned by a private equity group, they are likely to be less experienced in acquiring companies, but that doesnt necessarily mean they will offer a lower price.
MIDSTREET TIPSome industries are not heavily consolidated and have yet to become saturated with large investor capital. Other industries are going through consolidation and experiencing increases in multiples due to high PEG and strategic buyer interest.
3. What Synergies Do They See?
There are a variety of synergies that a strategic could see within your business and theirs, such as:
- Economies of scale - This is when a business experiences cost advantages from acquiring other businesses and becoming larger. This causes the costs to be spread out, increasing the profit margin of the company.
- Geographic expansion - If the strategic is not in a particular market but wants to expand into it, it is often easier to buy into the market than to start from scratch.
- Reducing competition - If you are a competitor to the strategic buyer in certain markets, by acquiring your company, they get rid of your business as competition.
- Eliminating redundant costs - Strategics often have consistent software that they use for all of their companies.
- Increasing buying power - The closer a strategic gets to a monopoly, the more control they have over the market. This gives them more freedom on what they can charge their customers.
- Establishing strategic alliances - With the strategic having locations in multiple markets, they’re able to guide customers to locations that make more sense for them, instead of sending them to a competitor.
- Fill a Gap in Their Supply or Distribution Process - Imagine you are a machine shop that produces a part necessary for the production of a piece of equipment. The company that manufactures and assembles the piece of equipment might purchase your company to reduce costs and have more confidence in the supply of the part you produce.
Knowing what synergies the buyer is most interested in will give you more leverage and insight throughout negotiations.
4. What Type of Deal Structure Are They Interested In?
To fully understand if the strategic’s goals align with yours, you have to figure out what type of deal structure they are interested in. A strategic will generally be interested in doing a majority recapitalization (majority recap) or a full buyout.
Majority recap - This structure allows you to retain a minority share of the company and stay on with the business to help continue growing it. Many private equity groups and strategics prefer this because you have the most experience running your business.
Full buyout - A full buyout is the best option if you’re planning on retiring. Strategic buyers who would prefer to perform a majority recapitalization will settle for a full buyout if that’s your preference, as long as you commit to a sufficient training period.
5. What is Their Plan For Integration?
When a strategic is considering buying your business, they will focus heavily on how your company will integrate with theirs. They will likely ask you about your organization chart and will probably want to meet with any key employees prior to the sale closing. We prefer to schedule these meetings a few days before closing if absolutely necessary for the buyer.
Depending on the industry and the buyer, some strategic buyers focus heavily on uncovering all they can about your company during due diligence and not integration. Others will focus heavily on integrating the two businesses so that they have a head start at the time of closing.
The exact integration process is complicated and beyond the scope of this article. For your reference, here are some of the things the strategic will be looking at:
Strategic buyers have likely figured out a process for almost everything they do. One of their goals is to transfer this knowledge to your company and your employees when it makes sense.
As part of integration, the strategic buyer will usually be able to afford better employee benefits because of economies of scale. One of their initial questions will be to want to know what you are currently offering your employees.
The strategic will be incentivized to keep and make sure your key employees are secured within the company, so they may offer top employees minority interests in the company, profit-sharing arrangements, etc. At the end of the day, it is your job to determine how the strategic plans on treating your people and if you think it would be a good fit.
Some strategic acquirers will want to phase out your brand and replace it with theirs, while others will keep your brand in place. Keep in mind that often, a strategic will eventually sell your business to an even larger buyer who may want to change the branding in the future.
If your brand is important to you, like it is for many owners, this is something you should consider when thinking about selling to a strategic.
The strategic will likely want to have your business integrated with their software system for accounting, ERP, point of sale (POS), etc. By including your business on the same software, the strategic will be able to save on technology costs and streamline processes.
The strategic will want to learn more about your existing suppliers/vendors and make introductions. In some cases, they will want to cut costs as much as possible. In other cases, they will want to gain access to products that they did not have previously.
Strategics will have training programs or platforms for employees that improve employee retention, company culture, and attract higher quality talent. Their goal is to seamlessly integrate your employees and future employees.
6. How Strong is Your Management Team?
The stronger your management team, the easier the business is to transition. Strategic buyers typically prefer acquiring companies with existing management structures because of the ease of integration.
The buyer will be looking to better understand how stable the management team is and what knowledge you have that it will need to transfer to another employee of the business, like a general manager.
If you perform a lot of functions that your management team is not familiar with, your company will likely be a lot less attractive to a strategic buyer. However, we’ve sold many businesses to strategics where the owner was highly involved in the business; it’s a matter of finding the right fit.
Ultimately, it will depend on the specific buyer and how attractive your business is to them. Your goal should be to make the transition process as easy as possible for the strategic buyer.
Determine if You Want to Sell to a Strategic Buyer
Deciding whether you want to sell to a strategic buyer is a choice that only you can make. Now that you know more about what to consider, you can weigh the pros and cons of your specific situation.
In some cases, you may identify more than one type of buyer you would be comfortable selling to. Find out more about other buyer types by reading “The 5 Types of Buyers for Your Business.”
Are you trying to determine the type of buyer you should sell your business to? Contact us today to discuss the types of buyers you could sell to.