5 Differences Between Financial and Strategic Buyers

Article Author: Garry Stephensen
Position: Managing Director
Read time: 7 mins

As you sell your company or raise funding, understanding the key differences between strategic and financial buyers can help you understand their decision-making processes. Clarifying what each type of buyer is seeking can help you decide which fits your situation best.

As a quick refresher, potential buyers / investors fall into two primary categories:

Strategic Buyers

These are operating companies that provide products or services and are often competitors, suppliers or customers of your firm. They can also be unrelated to your company but looking to grow in your market to diversify their revenue sources. Their goal is to identify companies whose products or services can synergistically integrate with their existing P/L to create incremental long-term shareholder value.

Financial Buyers

These include private equity firms (also known as "financial sponsors"), venture capital firms, hedge funds, family investment offices and ultra high net worth individuals (UHNWs). These firms and executives are in the business of making investments in companies and realizing a return on their investments. Their goal is to identify private companies with attractive future growth opportunities and durable competitive advantages, invest capital, and realize a return on their investment with a sale or an IPO.

Because these buyers have fundamentally different goals, the way they will approach your business in a M&A sale process can differ in many material ways. There are five primary ways they differ:

Evaluation of Your Business

Strategic buyers evaluate acquisitions largely in the context of how the business will "tie in" with their existing company and business units. For example, as part of their analysis, strategic acquirers will ask questions like:

Are the products sold to their customers?
Does your company serve a new customer segment for them?
Are there manufacturing economies of scale we can realize?
Is there intellectual property or trade secrets that you've developed that they want to own or prevent a competitor from owning?

Conversely, financial buyers won't be integrating your business into a larger company, so they generally evaluate an opportunity as a stand-alone entity. In addition, they often buy businesses partially with debt which causes them to scrutinize the business' capacity to generate cash flow to service a debt load. Financial buyers are also focused on understanding how to quickly increase the long-term value of the company to ensure an acceptable return on their investment.

While both buyer groups will carefully evaluate your business, strategic buyers focus heavily on synergies and integration capabilities whereas financial buyers look at standalone cash-generating capability and the capacity for earnings growth.

One not of caution is that all buyers cannot be nearly categorized. Sometimes "strategics" are just looking to boost their earnings and end up acting like financials. Other times, "financials" already own a company in your space and are looking to make strategic add-ons, so they'll evaluate your business more like a strategic. By understanding the motivations of the buyer, you can understand how they're determining your business value.

Determining the Investment Merits of the Industry

While this might seem obvious, strategic buyers usually are more "up to speed" on your industry, its competitive landscape and current trends. As such, they will spend less time deciding on the attractiveness of the overall industry and more time on how your business fits in with their corporate strategy. Conversely, financial buyers are typically going to spend a lot of time building a comprehensive macro view of the industry and a micro view of your company within the industry. It is not uncommon for financial buyers to hire outside consulting firms to assist in this analysis. With this analysis, financial buyers might ultimately determine they do not want invest in any company in a given industry. Presumably, this risk is not present with a strategic buyer if they are already operating in the industry.

As the seller, the risk of having a sale process fail due to "industry attractiveness" factors is reduced by ensuring that you are soliciting strategic buyers.

Strength of Back-Office Infrastructure

Strategic buyers are going to focus less on the strength of the target company's existing "back-office" infrastructure (IT, HR, Payables, Legal, etc) as these functions will often be eliminated during the post-transaction integration phase. Since financial buyers will need this back-end infrastructure to endure, they will scrutinize it during the due diligence process and often seek to strengthen the infrastructure post-acquisition.

As such, you'll likely want to de-emphasize the importance and/or value of your back-office infrastructure in discussions with a strategic, whereas it's important to be prepared for thorough evaluation of these functions when having discussions with a financial buyer.

The Impact of the Investment Horizon

Strategic buyers intend to own an acquired business indefinitely, often fully integrating the company into their existing business. Financial buyers typically have an investment time horizon of four to seven years. When they acquire and subsequently exit the business, especially in the context of the overall business cycle, will have an important impact on the return on their invested capital.

For example, if your business is purchased at the peak of a business cycle for 8X EBITDA and the buyer can only sell it for 6X EBITDA 5 years later, it's tough to make an attractive return. As such, financial buyers are going to be more sensitive to business cycle risk than strategic buyers, and they will be thinking about various exit strategies for your company before making the final decision to invest in / buy your company.

Transaction Efficiency

Financial buyers are in the business of making acquisitions. It it one of their core competencies to execute deals in a timely fashion. Strategic buyers may not have a dedicated M&A team, may be encumbered by slow-moving boards of directors, bureaucratic committees, territorial division managers, necessity to check acquisition against internal projects, etc.

From our experience, combine these factors and the process with strategic buyers can often take longer than with financial buyers. No matter what, be prepared for a 6-12 month process BEFORE you decide to sell.

There is more to be said about the many important differences between strategic and financial buyers, but these are the basics. Any questions, as always please feel free to ask them in the comments or contact us directly if you want to take it offline.

By Cody Boyte - courtesy AXIAL Forum

Navigating Post-Acquisition Integration: Strategic vs. Financial Buyers

Acquiring a company is a complex process, but integrating the acquired business post-acquisition can be even more challenging. This phase is crucial as it determines whether the acquisition will fulfill its intended objectives or fail to deliver the anticipated value. Both strategic and financial buyers have distinct approaches to post-acquisition integration, shaped by their respective goals and operational philosophies. Understanding these differences and implementing best practices can significantly enhance the success rate of mergers and acquisitions (M&A).

Challenges of Post-Acquisition Integration

Cultural Differences:
- Strategic Buyers: These buyers often face the challenge of merging two corporate cultures. Differences in values, work ethics, and management styles can lead to friction, impacting employee morale and productivity.
- Financial Buyers: While cultural integration might be less pronounced for financial buyers, it still matters. Maintaining the acquired company's culture while implementing changes can be tricky, especially if cost-cutting measures are involved.
Operational Integration:
- Strategic Buyers: Integrating operations such as production, sales, and distribution channels is critical for realizing synergies. Misalignment in operational processes can lead to inefficiencies and disrupt business continuity.
- Financial Buyers: These buyers might not immediately integrate operations but focus on optimizing the existing processes. However, any changes made to improve efficiency can still disrupt day-to-day operations if not managed carefully.
IT and Systems Integration:
- Strategic Buyers: Harmonizing IT systems is crucial for seamless data flow and operational efficiency. Integration issues can lead to data inconsistencies and operational bottlenecks.
- Financial Buyers: They may choose to upgrade or replace existing IT systems to improve performance. The challenge lies in implementing these changes without significant downtime or disruption.
Retention of Key Talent:
- Strategic Buyers: Retaining key employees is essential for maintaining business continuity and achieving strategic objectives. The uncertainty during integration can lead to attrition if not managed well.
- Financial Buyers: Talent retention is equally critical, especially since these buyers often rely on the existing management to drive value creation. Offering incentives and clear communication can help in retaining key personnel.

Best Practices for Integration

Develop a Comprehensive Integration Plan:
- Strategic Buyers: Create a detailed plan that outlines the integration steps for all functional areas, including timelines and responsible teams. This plan should focus on realizing synergies and ensuring smooth operational integration.
- Financial Buyers: Develop a plan that emphasizes value creation through operational improvements and cost efficiencies. This plan should also include timelines and accountability but might focus more on financial metrics and performance benchmarks.
Communication and Transparency:
- Strategic Buyers: Effective communication is key to managing cultural integration. Regular updates and open forums for employees to voice concerns can help alleviate anxiety and build trust.
- Financial Buyers: Transparent communication about the goals and changes expected post-acquisition can help manage expectations and reduce uncertainty. Clear articulation of the benefits for employees can aid in gaining their support.
Retention Strategies:
- Strategic Buyers: Implement retention bonuses and career development opportunities to keep key talent engaged. Highlight the business growth prospects and stability that come with being part of a larger organization.
- Financial Buyers: Offer performance-based incentives and equity stakes to align the interests of key employees with the new owners. This can motivate them to drive performance improvements.
Cultural Integration Programs:
- Strategic Buyers: Establish cultural integration programs that include workshops, team-building activities, and cross-functional projects to foster a unified corporate culture.
- Financial Buyers: While the focus might be less on cultural integration, promoting a culture of performance and accountability can help in aligning the existing team with the new objectives.
Operational Synergies and Efficiency:
- Strategic Buyers: Identify areas where the combined operations can achieve cost savings or revenue enhancements. This could include consolidating supply chains, cross-selling products, or integrating R&D efforts.
- Financial Buyers: Conduct a thorough review of the acquired company's operations to identify inefficiencies. Implement best practices and lean methodologies to streamline processes and improve profitability.
IT and Systems Integration:
- Strategic Buyers: Plan for a phased integration of IT systems to minimize disruption. Prioritize critical systems and ensure data integrity throughout the process.
- Financial Buyers: Evaluate the existing IT infrastructure and invest in upgrades that offer the best return on investment. Ensure that any changes are implemented with minimal impact on daily operations.
Change Management:
- Strategic Buyers: Employ change management techniques to guide employees through the transition. This includes training programs, support systems, and clear communication about the changes and their benefits.
- Financial Buyers: Use change management to drive performance improvements. This involves setting clear expectations, providing necessary training, and monitoring progress closely.
Performance Monitoring and Adjustments:
- Strategic Buyers: Establish metrics to track the progress of integration efforts and the realization of synergies. Be prepared to make adjustments based on feedback and performance data.
- Financial Buyers: Monitor financial performance closely and adjust strategies to ensure the desired returns are achieved. This might include re-evaluating cost structures, pricing strategies, or market approaches.
Customer and Supplier Relationships:
- Strategic Buyers: Communicate with customers and suppliers about the acquisition and integration plans. Assure them of continued service quality and explore opportunities for deeper collaboration.
- Financial Buyers: Maintain strong relationships with key customers and suppliers while evaluating any opportunities to renegotiate terms or consolidate contracts for better efficiency.
Long-term Vision and Strategy:
- Strategic Buyers: Develop a long-term vision that aligns the acquired company's strengths with the strategic goals of the parent organization. This includes exploring new markets, product innovations, and leveraging combined resources.
- Financial Buyers: Focus on building a robust exit strategy that maximizes the value of the investment. This might involve preparing the company for an IPO, seeking a strategic buyer, or driving substantial growth to attract future financial buyers.

Navigating post-acquisition integration is a multifaceted challenge that requires careful planning, clear communication, and strategic execution. Both strategic and financial buyers bring unique perspectives and approaches to this process, influenced by their distinct goals and operational strategies. By understanding these differences and implementing best practices tailored to each approach, companies can enhance the likelihood of a successful integration, realizing the full potential of the acquisition and creating lasting value.