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blog for plurafinancial.com, an online matchmaker between banks & small businesses

Posts Tagged ‘Strategic

Strategic vs. Financial Buyers (the pros & cons)

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If you’re thinking about buying or selling a business, it’s important to know the types of buyers.  Buyers are generally classified into the following two different categories, including the pros and cons of each:

  • Strategic Buyers:  These are companies that believe your business fits well within their existing business, and there is a strategic reason for them to buy that might go beyond monetary gain.
    • Pros
      • Typically offer a higher purchase price than “financial buyers”
      • There may be some competitive advantages from joining forces with another company, including increased purchasing power with suppliers, cross selling to customers, cheaper cost of capital, etc.
      • No immediate plans to flip/sell the company again.
    • Cons
      • Tend to include their company stock as part of the purchase price (instead of giving you all cash at close).
      • They’ll probably fire a bunch of people, including management, because so many positions will be redundant (duplicative).  Part of the reason they pay a higher price than “financial buyers” is because strategic buyers can immediately cut so many costs out of the business; no need for two regional managers at the same company covering the same region.  And every $1 of cost savings the buyer creates is worth $5-$7 due to the EBITDA multiple effect in corporate valuation (companies are generally sold for 5x-7x EBITDA).
  • Financial Buyers:  Investors that are purely interested in monetary gain.  Similar to flipping houses.
    • Pros
      • Most employees, including management, will likely keep their jobs
      • Likely an all cash offer (versus buyer’s stock being part of the purchase price)
    • Cons
      • Increased leverage.  Financial buyers typically use debt to finance up to ~75% of the purchase price, leaving the business saddled with a significant amount of new debt that might strangle the company’s cash flow and limit its financial flexibility.
      • Lower purchase price.  Financial buyers typically pay less for a company than strategic buyers because there are fewer “synergies” to be had that might otherwise justify paying a higher premium.

-Brandon Hinkle / www.pluraFinancial.com

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