More often than not, the buyer for your business will come from your industry or an adjacent sector. We refer to these as “Strategic Buyers” who typically can afford to pay the most for your business, due to potential synergies (e.g. cost savings & revenue growth) in combining your business with theirs. The other important category of buyers is Private Equity, increasingly a factor in M&A deals, often backing the less well-capitalized Strategic Buyers. A subset of Private Equity is Family Offices, usually smaller acquirers focused on particular niche areas.
Private Equity Fund (PE) vs Strategic Acquirer vs Family Office
Outlined below are some of the key attributes of each type of buyer for your consideration. There is no right or wrong choice, and each has positives and negatives to be aware of.
Strategic Acquirer
A strategic buyer is generally a larger corporate entity in your line of business, an adjacent sector, or one who covets your area of expertise and views you as a critical tactical purchase. They may know a fair amount about your business in advance, if they are a competitor or customer. Depending on how mission-critical they think buying/owning your business is to the growth and success of theirs, the higher the value they will place on owning your business. But they will likely only pay that full value in a well-run and broad-canvas sale process (aka “auction”).
If you are introduced to a large multi-division Strategic acquirer for the first time by your M&A Advisor, it will be important for your Advisor to position your business with the right divisional executive/sponsor within the buyer’s organization who will understand the fit within their division, and make the compelling case internally (e.g. CEO, Board of Directors, etc.) to ensure priority focus. Navigating the internal decision-making process in these large companies takes skill, finesse and experience. Be sure your M&A Advisor has these attributes.
In today’s global M&A markets, strategic buyers who will bid most aggressively often come from outside the US, so it’s paramount that your M&A Advisor have the capability, persistence and willingness to conduct an international buyer canvas for your business.
Private Equity (PE)
Private Equity firms seek to secure majority control or have significant minority ownership, in attractive businesses which they can either use as a base to expand from (a platform investment) or as an add-on augmenting an existing investment in their portfolio. This would typically be a portfolio company for which your Company is in the same line of business or a related field, and which combined, would strengthen the overall business proposition.
PE firms offer many positive elements:
- Additional capital to help the business grow
- Improved infrastructure
- Broader sales and marketing capabilities
- An expanded network of relationships
- Deeper focus on analytics and key metrics
- Retention and more expansive career paths for key employees
- Financial incentives, such as earn-outs for owners and equity for employees
- Upside potential in a future sale
All PE firms are different. Some have deep industry expertise; some are looking for exciting new opportunities in fragmented (i.e. many smaller players) industries which are ripe for consolidation. Some focus on retention of team, while others have deep benches with talent, they want to bring in.
Family Office
A family office is more akin to a PE firm, and usually focus on one or two niche areas, often around a core mission. While a PE firm typically holds investments for 3-7 years before selling the business again, most family offices have much longer horizons and are looking for growing cash flow quite often to support their core mission and vision. They are generally less hands-on in terms of management and if the business is run well and growing will be less intense in their interactions than PE owners.
While many positive attributes exist within each possible entity, the negatives are more a function of your desires going forward. You need to be honest with yourself as to whether you want a meaningful role in the future, for how long, and whether you can live within certain new boundary lines which will be drawn for you. Think these points through carefully upfront to ensure a smooth process and fewer surprises later.
How to Find the Right Buyer?
A sophisticated Advisory firm will guide you based on your specific criteria and negotiate on your behalf to secure the most favorable terms. It is in your best interest to showcase your business across a broad spectrum of firms to find the right fit and relationship you feel comfortable with as the optimal owner for yourself, your employees and your valued customers. Compare and contrast the attributes of the different parties with your trusted Advisor to achieve a successful outcome.