We talked about the importance of drawing individual buyers to the sale of a business with emotional appeals.
These motivations play a key role in understanding the buyers that may be drawn to purchase a business.
However, emotional appeals are not as motivating to other types of business buyers.
The two other types of business buyers, financial and strategic buyers, are primarily motivated by the return that can be achieved from the purchase.
For example, a financial buyer is most interested in:
- Cash flow
- Exit strategies the investment will offer in the future
- An initial public offering (IPO) to take a business public
A financial buyer is different from a strategic buyer, who is mostly interested in a company’s strategic goals. Strategic buyers also wish to remain involved in operations.
Financial buyers, often private equity firms, wish to make the purchase but not continue managing operations.
Let’s look at how these two types of buyers differ, whether financial or strategic buyers are the right fit for a sale, and how a seller can motivate them to take over as owner of their business.
Financial Buyers vs. Strategic Buyers
Quickly, a financial buyer is typically a long-term investor looking for a solid, well-managed company.
They are not involved in management or changes not designed to make a company more profitable and more attractive to future investors.
Financial buyers focus on how much cash flow a business generates or how to improve them by growing revenues or cutting costs. They look at possible exit strategies, such as an IPO or selling the company outright to a strategic buyer.
Strategic buyers are hands-on buyers often willing to pay more for a company than financial buyers for two reasons:
- They may be able to realize synergistic benefits through the combined purchasing power of the new entity and the elimination of duplicate functions
- They are generally larger companies with better access to capital
The strategic buyer, therefore, is buying based on how a company will enhance their existing operations and are much less likely to retain current personnel.
Which Type Is Right for a Business Sale?
A seller’s goals determine whether a strategic or financial buyer is the right choice when selling a business.
Goals that work well with strategic buyers include:
- Highest price possible – If the seller is not concerned with employee retention, a strategic buyer and possible open auction process will most likely be the best fit
- A high price with stipulations – If the seller wants to protect employees but net a high price, a strategic buyer will still be the better fit, but they will have to concede from taking the highest possible price
Goals that work well with financial buyers include:
- Selling but remaining a few years – If the seller wishes to take over as manager for a few years, a financial buyer can take on operations and creating synergy among other entities while eliminating top management
- Keeping management in place – Financial buyers will usually welcome management to stay and manage the business
What Motivates Financial and Strategic Buyers?
While financial buyers may see the potential for expanding cash flow, they are generally not willing to pay for that potential, so financial statements are the big draw for a lucrative sale.
A financial buyer will be looking at:
- The bottom line over potential earnings
- A well-managed company
- Consistent earnings and growth
The largest group of financial buyers is private equity (PE) firms, which work by raising funds, purchasing companies, growing them, and selling them again within 10 years.
Therefore, PE firms have specific time constraints, and are willing to pay more for a business to hit their investment timeframe.
Strategic buyers are drawn to businesses that have synergies with other businesses they own.
Strategic buyers are seeking new products or services that work with their existing customer base, and with their existing supply chain.
Buyer Motivation
Buyer motivation refers to the individual reasons that drive a person to make a business purchase.
As an individual buyer can be influenced by a variety of factors, including practical needs, emotional desires, and social pressures, financial and strategic buyers are strictly influenced by how much a new business will earn them.
What motivates a financial exchange not influenced by emotional appeal depends on whether a strategic or financial buyer would be a better fit.
In general, a strategic buyer is looking for a long-term investment and synergy, and a financial buyer that and a financial buyer is looking at the bottom line over potential or growth.
Time, cost, and financial statements that reveal a well-run and profitable business will be key in drawing these types of buyers.
Michigan Business Broker Nadir Jiddou is Here to Help
Having bought and sold businesses for more than 18 years in Michigan, Nadir Jiddou utilizes his contacts and experience to help his clients achieve their objectives quickly.
Call us at (248) 220-3274 or look at the business listings we currently have on hand to see what might be a fit for you.