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What are some of the key differences between a financial buyer and strategic buyer?

James Darnell
Profile Picture of James Darnell James, a partner at KLH Capital, is responsible for identifying, structuring and executing transactions; due diligence; financial analysis; and portfolio management. He is a member of the KLH Investment Committee and is responsible for all SBIC compliance. He serves on the board of directors for all KLH portfolio companies and is directly responsible for overseeing Federal Resource Supply Company.
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Q:

What are some of the key differences between a financial buyer and strategic buyer?

A:

The key difference between a strategic buyer and a financial buyer is that a strategic buyer is typically going to be buying all of your company. There are a couple of differences once this happens. The first is that the strategic buyer is typically going to be buying 100% of your company. Second, a strategic buyer is going to absorbing that company into some broader operations or broader business that they already have. So your company, which used to be autonomous, is now going to become another division or another part of some larger company, with all of the associated dynamics that go along with being part of a larger company. Those are the two biggest differences specific to a strategic buyer; you’re going to be selling all of your company and you’re going to be working for someone else as part of a larger organization.


Whereas with a private equity group, most private equity transactions are not 100% buyouts for the entrepreneur. There are situations where the entrepreneur is partnering with the private equity group to take on an investment, in order to facilitate a liquidity event, recapitalization, or management buyout of some sort. Whereby the entrepreneur continues to own a large portion of the business, typically 20, 30, 40% of the business going forward. They retain operational control of the business. They are still the boss. They run the business day to day and so they continue to set the direction and execute their plan. The owner continues to run the business in a way that they are accustomed to.


The last difference is that they’ve actually got a partner who is focused on helping them grow their business. The core mission is to grow their business. Whereas with the strategic buyer, the business becomes just a division that is hopefully going contribute to the overall mission of the larger organization.


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