Trade vs. Financial Buyers: How to Choose the Right Acquirer for Your Business

When preparing to sell your business, one of the most important decisions you’ll make is identifying the type of buyer you want to sell to. Broadly speaking, buyers fall into two key categories: strategic (trade) buyers and financial (private equity) buyers.

These buyers have very different motivations, timelines, approaches to valuation and decision-making. Understanding this can help you optimise your approach, and know what to expect in the process to get a successful outcome.

Here’s some tips of how to assess which buyer type may be right for you.

Strategic vs. Financial Buyers: What’s the Difference?

Strategic buyers are typically corporate acquirers looking to expand their capabilities, market share, or geographic footprint. They will typically want to acquire 100% of your business and you may be able to step back from your role after a transition period. Your company’s financial performance is important, but often not the key rationale for the deal, which is strategic fit.

Financial buyers, most commonly private equity firms, are focused on investing to generate a profitable return, growing the business over 3-5 years and then selling it on. Private equity buyers tend to acquire a majority stake and expect management to retain/invest a meaningful stake, so you should generally expect an ongoing role in the business.

What Motivates Your Buyer?

Strategic buyers are driven by synergies. They look at how your business fits into theirs:

• Does your product accelerate their roadmap?
• Do you enable something that they can’t do (but want to), or open up a new market for them?
• Can they cross-sell to your customers?
• Can they reduce costs by combining operations?

The key for these buyers is being able to clearly articulate what they can do with your business, e.g. by bringing global distribution to drive a step change in your sales.

Private equity buyers care about financial metrics. They want profitable, proven companies with predictable growth potential and reliable cash flow. They are focused on:

• How much do we need to pay to buy this company?
• How much can it grow?
• What can we sell it for in a few years?

They usually want to partner with existing management team who will continue running and scaling the business, so if you want to move on after the transaction then you will need a successor in place prior to completion (sometimes that person can be identified as part of the diligence process).

Decision-Making: Speed and Process

Strategic buyers often involve several layers of decision-making prior to making a bid. Getting buy-in from multiple stakeholders, fitting in with timing of cross-functional reviews, and accessing the senior people required for approvals can take several months, so make sure you know who needs to be involved and where they are in their process, factoring the timeline into your M&A process.

In contrast, private equity firms tend to have leaner teams and quicker processes. Making deals is their core business, and decisions are typically made by a small group of partners or an investment committee. You can often get a non-binding indication of interest pretty quickly, but diligence processes may be longer once a deal is agreed in principle.

It’s often helpful to including financial buyers in a sale process, as this can apply time pressure on strategic buyers to reach a quicker decision and increase competitive tension.

How Buyers Determine Price

Strategic buyers will pay according to the strategic value of the problem you are solving for them, and how much of a competitive edge they can generate, although they will clearly also reference market benchmarks. This can mean that the price they are willing to pay may be more than a purely financially driven buyer.

Financial buyers are disciplined on price. They’ll focus on EBITDA multiples (or maybe revenue multiples if they are experienced growth-oriented software investors), comparable transactions, and expected returns. Their pricing model is grounded in your financials, the level of risk they are willing to take, and expectations of future exit.

Remember: running a competitive process with several interested buyers will drive up valuation regardless of buyer type so you should always be talking to more than one buyer.

Which Buyer Type Is Right for You?

There’s no one-size-fits-all answer. Your ideal buyer depends on your own goals and objectives:

• Looking for a full exit? A strategic buyer may offer a clean break and a premium price today.
• Want to de-risk but stay involved? A private equity deal might let you take some money off the table now and continue growing the company as an independent business. You can keep some investment in the business and benefit from the future (higher) exit.

At FirstCapital, we work closely with clients to align the transaction strategy with your goals in order to deliver win-win deals. Our SMART approach assesses the business, the market, the key drivers of value and shareholder objectives before curating a tailored buyer list and implementing a targeted approach to the right buyers.

Final Thought

Whether you choose a trade buyer or a financial sponsor, success starts with preparation. Understanding your objectives and your buyer motivations, aligning timelines, and running a SMART process ensures you maximise value and minimise surprises.

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