Advantages Between Strategic and Financial Buyers

Business owners will encounter two types of buyers when they are ready to sell their company: strategic buyers and financial buyers. The motivations, approaches, and offers made by these two buyer types can vary widely, and it’s important to understand the nuances of each prior to starting a sale process.

Strategic or Corporate Buyers

Corporate acquisitions (strategic) of small businesses typically involve a larger public or private company buying a small business to add customers or products, to remove competition, to acquire intellectual property, or to enter a new market. These acquisitions typically involve the larger corporate buyer buying 100% of the target company. Post-transaction, the target company will typically be fully absorbed by the larger corporate buyer.

Strategic acquirer advantages:

  • May be able to pay a higher purchase price, as they can sometimes reduce costs by absorbing the company and reducing overhead and headcount
  • Often have deep industry knowledge, and complementary products and customers

 

Strategic acquirer disadvantages:

  • Higher purchase price often comes with a larger percentage of earn-out
  • Purchaser not typically interested in maintaining the target company’s brand and legacy
  • Employees are often let go to cut costs and eliminate redundant functions
  • The two companies may encounter cultural issues when attempting to integrate with one another
  • M&A failure rates by strategic buyers are between 70% and 90%
  • The process requires sellers to share sensitive information with potential competitors during due diligence
  • There isn’t typically the opportunity for owners to maintain equity in the business unless it is in the form of equity in the acquirer’s business

Your Financial Buyers Options

Financial buyers include different types of investment groups that acquire businesses in order to achieve financial returns. The terms and deal structures offered by different financial buyers may vary depending on their size, sophistication, economic goals and existing holdings.

Private equity advantages:

  • Can bring in new leadership if needed
  • The owner can retain equity, positioning for a second exit

 

Private equity disadvantages:

  • Use substantial bank debt to pay for the business
  • Generally financial engineers, not value creators
  • Often cut expenses

 

Fundless sponsors advantages (in addition to those attributed to private equity):

  • May bring specific industry knowledge, expertise, networks, and resources to bare

 

Fundless sponsor disadvantages (in addition to those attributed to private equity):

  • Lack committed capital, which may result in a deal not closing if they are unable to attain the financing needed to execute the deal that they have negotiated

 

An example of a non-traditional financial buyer that caters specifically to small businesses is Tide Rock Holdings. Because Tide Rock holds its investments for an indefinite amount of time, its strategy is to grow the business, create value, build on the founder’s legacy and retain the company’s employees.

 

Tide Rock advantages:

  • Long-term perspective on investments
  • Can bring in new leadership if needed
  • Owner can retain equity, positioning for a second exit
  • Ability to preserve and build upon a company’s legacy and team
  • Committed capital from other long-term oriented investors
  • Specializes in building B2B companies doing $1-5m in EBITDA
  • Back-office resources to support partner companies
  • Significant flexibility in deal structuring

 

Tide Rock disadvantages:

  • Can’t purchase companies >$5m EBITDA
  • Relies on qualified CEOs to be industry expert (existing or new leadership if needed)

 

If you have a business with $1-5m EBITDA, we would love to have a conversation to see if there could be a mutual fit. Give us a call or send us an email to connect.

The team at Tide Rock has been fantastic to work with. They add tremendous value in both strategic thinking as well as tactics. They are there when we need them and allow the management team to operate without micromanaging. I could not ask for a better investor or partner.
Peter Heald, CEO, Signature Analytics

Christopher Adams

Christopher Adams

Christopher sources and evaluates new investment opportunities for Tide Rock Holdings and works with existing portfolio companies to execute add-on acquisitions. He maintains Tide Rock’s relationships with investment banks and other intermediaries.