Smarter Thinking

Is a Financial Buyer the Right Choice for my Business?

1st May 2019

Over the last few years, we’ve seen a huge increase in the number of financial buyers acquiring tech companies. More and more sellers are choosing to include financial buyers in the mix alongside strategic buyers because they can bring considerable advantages in terms of speed and certainty of close. In many cases, they are prepared to pay competitive prices too, comparable to those offered by strategic buyers.

What is the difference between a strategic buyer and a financial buyer? 

A financial buyer is typically a private equity fund. They will buy a majority stake in the business as an investment opportunity, typically intending to sell the business on for a profit in future (within 3-5 years).

By contrast, a strategic buyer is a corporate firm who sees the transaction as a commercial opportunity. They are interested in synergies and will want to determine if your company fits into their firm’s long-term strategy.
For more information on the differences between a strategic buyer and a financial buyer, read our guide on Assessing The Right Buyer Type for your Business
Financial and strategic buyers differ in many ways and it can be hard to establish which is the best option for your business in the long term.

Here are three advantages of selling to a financial buyer you might not be aware of – and three cases where selling to a strategic buyer might be the better choice.

Why sell to a financial buyer

Reason #1: You tend to retain strategic control of the business

In a trade sale, the new corporate owner has objectives for its new subsidiary. They will usually exert their control to align decision making with their own strategic priorities. But in a private equity transaction, the managers continue to run the business as an independent entity, with the buyer as their partners.
Reason #2: They fast-track the dealmaking process

Strategic buyers have long approval cycles with an extensive list of decision-making stakeholders involved in the deal. Navigating their buy-in and corporate approval processes can be very time-consuming.

Private equity firms typically have fairly small teams who are very familiar with the dealmaking process. Experience shows that tactically, including financial buyers in the process can put pressure on timing for strategic buyers, helping to accelerate their internal approval cycles and thus speeding up the transaction.
Reason #3: They can help drive your next phase of growth

Bringing in a private equity partner can be an ideal way to power your next phase of growth,  allowing you to derisk by taking some money out of the business but enabling you to retain a stake in creating further value. They can help to fund acquisitions, for example, or simply provide the finance you need to progress with your growth strategy.


Why sell to a strategic buyer

Reason #1: You can choose to exit in full                

With a trade sale, you would typically sell your stake in full (albeit it may be subject to earnouts), whereas with a private equity sale you are often committing to a further 3-5 years with the business and keeping a significant amount invested.
Reason #2: You gain more resources to achieve your goals

As a growing business, you might not have the resources to achieve your most ambitious objectives like international expansion or future acquisitions. With a larger corporate partner on board, this opens up new growth opportunities as you combine your resources and networks, mutually filling gaps in roadmaps, commercialisation resources, talent pools and client bases.
Reason #3: You could realise more value

Private equity firms benchmark your valuation off your financial performance, but many growing tech businesses are still not profitable, so this can be a challenge. A trade buyer, on the other hand, may well be willing to pay a higher price if there is a compelling commercial opportunity or strategic fit resulting from the transaction, which is often the case with a technology business.

How do I choose the right buyer type for my company?

A financial buyer is a good choice for a seller looking to bring in a partner to power their next phase of growth (particularly if the business is already profitable), whether that means continuing in the direction they were headed or adding some extra fuel to the fire by helping to fund acquisitions.

A corporate buyer may be a more appropriate option if there is a good strategic reason to join forces with a larger entity with complementary resources, or where market or competitive forces are such that it makes sense to realise all the value today.

Whichever you decide to go for, include a mix of strategic and financial buyers in the auction process to achieve the best results.

Every business is different, so there is no obvious “right answer”. To get a professional view on your next steps for your individual situation if you’re considering a sale, get in touch with one of our M&A advisors.