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Financial vs. Strategic Buyers: The Key Differences Between the Two

     
If you're looking to sell your business, you might not think at first that the buyer's identity is very relevant to you — only the terms of the deal that you work out. However, not all buyers are created equal, and the entity to whom you sell will ultimately have a major impact on the sales process.
When it comes to business mergers and acquisitions, buyers are generally separated into two types: financial and strategic. Here's a look at the distinctions between them and how these differences will affect your bottom line.

Who Are Financial and Strategic Buyers?

The terms "financial" and "strategic" are used to identify the buyer's main objective in purchasing your business. Financial buyers, on one hand, include companies such as private equity and venture capital firms, as well as hedge funds and ultra high net-worth individuals. Their motives are primarily financial in nature; they want to invest capital in your business and see a return from it later on.
 
Meanwhile, strategic buyers are companies that operate primarily outside of the finance space. They may be your direct competitors or connected to you through a supply chain, such as your vendors or customers. Strategic buyers may also be looking to enter your market or diversify their business by purchasing your company. In short, their goals are strategic in that they want to create long-term value for an existing business.
 

Differences Between Financial and Strategic Buyers

Of course, every potential buyer is different; so-called "strategic" buyers can make decisions from a stereotypically "financial" point of view, and vice versa. More often than not, however, the two types of buyers will behave in different ways when it comes to the following aspects of the sales process.
 

Business Assessment

Since they're approaching your business from a distance, financial buyers tend to focus purely on your company's ability to generate profits in a short amount of time. Strategic buyers, on the other hand, are more concerned with how the purchase will integrate with their existing business processes — for example, whether you have an overlapping customer base or whether you have trade secrets that they want to own.

Industry Focus

Financial buyers need to evaluate not only the attractiveness of your company as an investment prospect, but also your industry's outlook and your company's position within the industry. Strategic buyers, however, are usually less concerned with the direction of your company's industry, often because they're in the same industry themselves.

Timeline

Typically, financial buyers own a business for several years before reselling it, which means that they need to plan their exit strategies well in advance and tailor their offers based on this expectation. This concern is not usually present for strategic buyers, who intend to hold onto your business indefinitely.
 

Existing Infrastructure

Because financial buyers need your business to run as a standalone entity, they will be much more concerned with your organization's back-office infrastructure, including human resources, IT and accounting. However, strategic buyers usually have this infrastructure already in place and can disregard it during the negotiation process.

Final Thoughts

Understanding the differences between financial and strategic buyers is an important distinction to make when you're looking to sell your business. Depending on the state of your company, you may choose to target one type of buyer or the other, or you may wish to emphasize or change certain things about your company in order to make it more attractive to potential buyers.
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