So, your broker wants to target strategic buyers.
What's a strategic buyer…?
As one of the most interesting buyer groups (and often the highest-paying), strategic buyers are one of the most important sub-set of acquirers you can target.
That said, exposing your information to strategic buyers in the sale process requires a higher standard of care than individual and financial buyers.
At MidStreet, we have helped business owners sell their company to a variety of buyers, including strategic buyers. Selling to a strategic buyer can benefit the seller greatly since the strategic buyer is usually willing to pay a higher premium for the business.
Do you want to figure out if a strategic buyer is the right fit for your business? We will cover what a strategic buyer is and the advantages/ disadvantages of selling to one, and more, to help you decide.
Let’s get started.
Who is Considered a Strategic Buyer?
A strategic buyer is a business in your industry or a complementary industry. Strategics are not necessarily direct competitors, but this distinction can get fuzzy. Sometimes the best strategic buyers are also competitors.
From a confidentiality standpoint, an ideal strategic fit would be a business in your industry that has multiple locations in adjacent states, but no footprint in your market. Again, not a direct competitor, but the company would achieve a strategic benefit from acquiring your business.
A business in a complementary industry may also be considered a strategic buyer. For example, say you own an HVAC company and you want to expand your services to include plumbing.
Buying a plumbing business with an established process and team is going to be your best bet. You go online and find a great plumbing company for sale and inquire on the listing. In this case, you are seen as a strategic buyer.
If you want to gauge if someone is a strategic buyer, ask yourself the following questions:
- Do they already own a business that is complementary to mine?
- Do they own a business exactly like mine in a different location and want to expand the service area?
- Do they own a business that uses what I supply or vice versa?
- Would they gain synergy from purchasing my business (i.e. market share, buying power, or a more integrated process)?
If you answered yes to any of the following, you may have a strategic buyer on your hands.
What Makes a Business a Fit For a Strategic Buyer?
Your business may be the perfect fit for a strategic if it could:
1. Help Them Expand Their Services
This is where our HVAC company and plumbing company example comes into play. If your business includes services that the strategic buyer is interested in offering, they may be more inclined to offer you a higher price for your business.
2. Increase Their Service Area
Say you own an HVAC business with a good reputation in Raleigh, NC. A strategic buyer may own a successful HVAC business with locations in Charlotte, NC, and Greenville, SC, and want to expand their footprint.
Since your heating and cooling business is well established, it is an attractive opportunity for the strategic buyer to grow their market share.
3. Fill a Gap in Their Supply or Distribution Process
A pallet manufacturing business may be experiencing issues with lumber availability or supply in their market, which is holding them back from doing as much business as they could be doing. They may consider acquiring a lumber mill to take more control over their supply chain and gain better access to resources.
4. Offer Them a Useful Synergy
If you own an HVAC company that has perfected a specific process in your industry, such as dispatching techs using software rather than a scheduler, and a strategic buyer can see that as an opportunity to merge processes, learn from the acquisition, and ultimately reduce their own personnel costs.
Another synergy could include a product synergy, wherein you and the strategic buyer are selling items to the same group of consumers, but have two distinct product catalogs with very little overlap if any.
What Are The Advantages of Selling to a Strategic Buyer?
There are multiple advantages of selling to a strategic, including:
1. You Can Receive a Higher Price For Your Business
If you sell to a strategic buyer, you are more likely to get a better price since your business provides additional value to them. They may also be competing against other strategic buyers in your industry who are also looking to acquire you and therefore bid up the price of your company.
2. The Deal Can Close Faster Than Average
Since a strategic buyer is usually familiar with your industry, they usually have a more streamlined due diligence process. They also often have dedicated team members who are responsible for acquisitions and motivation to close quickly to start benefiting from the synergy between the two companies.
3. Your Employees May Receive Better Benefits
This is a common motivation among business owners who are selling to strategics. Few businesses have the scale to offer their employees health, dental, vision, 401k, and other benefits. A strategic can often offer very attractive benefits and incentive packages for your employees.
What Are The Disadvantages of Selling to a Strategic Buyer?
Although there are many positives to selling to a strategic buyer, there are some disadvantages, such as:
1. Your Business May be Moved to a Different Part of The Country
If your business appeals to a strategic buyer, but their base operations are in a different part of the country, they may move your business closer to them. This can inadvertently affect your current employees and their job security.
2. Some of Your Employees May be Laid Off
As we mentioned above, a strategic buyer may want to purchase your business because of the cost synergies they see between your company and theirs. As a result, one of the ways they may cut down on costs is to lay off duplicate roles, like administrative assistants, bookkeepers, or managers.
3. You Risk Confidentiality by Selling to Someone in Your Industry
Remember when we said the lines between competitor and strategic can be fuzzy? When you choose to pursue an offer from a strategic buyer, you provide them with confidential information about your business during the due diligence process. If the deal does not work out, that strategic buyer within your industry will know information about your company.
These things can be deal breakers for some sellers, but not for others. Ultimately, you and your broker will have to balance the risk and rewards of exposing the information to strategic buyers.
Decide if a Strategic Buyer is the Right Fit For Your Company
Now you know what a strategic buyer is and what they look for in a business.
Even if your business is a perfect fit for a strategic buyer, they may not be your preferred buyer. By realistically assessing the type of buyer you want to sell to, you can help your broker hone their search for the perfect buyer.
Are you still trying to decide what type of buyer is the right fit for your business? Learn more about other types of buyers in our blog “The 5 Types of Buyers for Your Business.”
Over the past 20 years, we have helped business owners sell their businesses to a variety of different buyers, including strategic buyers. If you are planning on selling your business and want to discuss who the best type of buyer for your business would be, reach out to us today.