Selling Your Business to a Strategic Buyer
Selling a business to a strategic buyer can be both challenging and rewarding. While finding a buyer whose goals align closely with the seller's business can be difficult, the process can be seamless and synergistic when it’s a good match.
A strategic buyer is a type of buyer or entity that acquires another business with a specific goal. Unlike financial buyers (such as private equity firms), strategic buyers are usually companies already operating in the same industry or related sectors. They’re savvy about business valuation and financial modeling. Their acquisition decisions are driven by ambition to gain a competitive advantage, expand their market presence, or enhance their overall business strategy, but they aren’t necessarily competitors.
What Motivates a Strategic Buyer?
Strategic buyers do their due diligence and operate with different goals and motivations. Mergers and acquisitions aren’t simple tasks, so the best business owners are armed with strong decision-making skills and the drive to find long-term value. Key motivations include:
- Market growth. Strategic buyers may expand their market share and increase their customer base.
- Diversification. Acquisitions can allow buyers to diversify their product lines or service offerings, so they can enter new markets or industries.
- Talent Acquisition. Access to a talented workforce and experienced management is often a motivating factor for strategic buyers.
- Technology and Innovation. Acquiring existing businesses with innovative technologies or processes helps strategic buyers stay at the forefront of industry advancements and maintain a competitive edge.
- Cost Savings. Achieving economies of scale is a common motivation. By combining operations, strategic buyers can reduce costs in production, distribution, and administration and increase cash flow.
- Vertical Integration. Strategic buyers may pursue vertical integration by acquiring businesses along the supply chain.
- Operational synergies to streamline operations and improve efficiency, reducing duplicate functions and optimizing resource utilization.
- Revenue synergies that make it possible to combine customer bases, cross-sell products or services, and enter new markets to increase revenue.
- Cost synergies to eliminate redundancies and leverage economies of scale, which boosts profitability.
- Technological synergies to enhance or complement innovative technologies.
- Market synergies to strengthen a stakeholder’s position in existing markets or gain entry into new geographic regions.
- Brand synergies to create a more powerful and recognizable market presence.
Synergies That Strategic Buyers Look For
A strategic acquisition isn’t always about one big company purchasing another big company—sometimes, it involves the buyout of an unassuming “Main Street” business in town that complements the needs of a larger company’s portfolio. The synergies of acquiring a smaller business include:
- Local market knowledge
- New products or services
- Agility and innovativeness, filled with fresh ideas and entrepreneurial spirit
- Established local distribution
- Strong customer relationships
- Competitive edge
- Cost-efficient acquisition
Smaller acquisitions can stem from an unadvertised exit strategy where the acquired company was looking for the right buyer. It may also allow a larger company to test products in a new market. This short-term test allows them to gauge consumer response, gather feedback, and refine offerings before launching on a larger scale.
Strategic Buyers and Private Equity Groups
The sales process for common deal structures among strategic buyers and private equity groups includes asset purchases, stock purchases, and mergers.
- In an asset purchase, the buyer acquires specific assets of the target company, allowing for a more targeted acquisition with reduced liabilities.
- Stock purchases involve acquiring ownership of the target company, often involving assumed liabilities.
- Mergers combine two entities to form a new organization, enhancing market presence and capabilities.
Each structure has unique advantages, with asset purchases offering flexibility, stock purchases providing ownership control, and mergers enabling strategic synergy. The choice depends on the buyer's objectives, risk tolerance, business plans, and the desired level of integration or consolidation between the acquiring and acquired entities.
Turn to Trusted Advisors
If you've been contacted by a strategic buyer about buying your business, ensure you have a team of professionals including an attorney, CPA, and intermediary on your side. With the assistance of seasoned professionals, you will receive unbiased advice about the best course of action. To find business brokers, visit BizBuySell's Business Broker Directory.