When it is time to sell your business, it is important to know the merit of different types of buyers who might come to the table. I came across a whitepaper written by Stephen Shaw, a corporate finance profession, that succinctly describes the difference between strategic and financial buyer.
Here is quick snapshot of the white paper:
|
STRATEGIC BUYERS |
FINANCIAL BUYERS |
How you position your
company |
How your company fits into theirs |
How your company acts as a stand-alone investment |
Your demonstration of
industry knowledge |
How your company fits into their vision of the industry |
Imperative and needs to be much more detailed |
| Your presentation of future vision and growth |
Already have a growth strategy (reason why they are looking to acquire yours) |
Need a detailed understanding of how the business model will evolve, M&A capabilities and targets |
The timing of your exit from
the company |
Typically ends within 6 months to 2 years |
Continues |
The importance of internal
rate of return (IRR) |
Not as important |
Very important (will have a target IRR — typically 25 to 35%) |
| Control and governance |
Upon your exit, left in the hands of the acquiring company |
Day to day decisions are still left to management. Broader strategic decisions left to board/financial buyer |
| Valuation and proceeds |
Valuation usually higher than financial. All proceeds are typically paid upfront |
Valuation typically lower than strategic. Partial sale is typically the norm with owner retaining carried interest thereby participating in future value of business. |
| Risk and leverage |
Little to no post-transaction risk |
Continues post transaction (with added risk of increased leverage) |
| Deal structure and tax implications |
Unique structure |
Tend to be more complex (shareholder agreements, etc.) |
Stephen Shaw, CA, is a Senior Vice President and Director and the Regional Corporate Finance Leader in MNP’s Toronto office. The entire white paper can be viewed at "Choosing the Right Buyer". It provides added insight and perspective on this monumental decision in the selling process. Stephen can be reached by email at [email protected].