What’s the difference between a strategic vs. financial buyer?
Why do most sellers seek out a strategic buyer over a financial one?
And how should the differences between these types of buyers influence how you think about selling your own business?
Here’s why this matters: Understanding what motivates strategic buyers vs. financial buyers is one step toward maximizing the value of your business at sale.
Strategic buyer vs. financial buyer
Both strategic and financial buyers aim to purchase businesses with the same goal in mind: to grow revenue over time.
But different types of buyers approach that goal in different ways.
A financial buyer uses capital and business chops to grow a company with the goal of reselling it at a higher value, while a strategic buyer focuses on acquisition as a way to create synergies with their existing business as a long-term play.
“Typically financial buyers are interested in acquiring a company for a period of time, building it up, and then flipping it,” said Curt Cyliax, managing director of Strategic Exit Advisors (SEA), which supports buyers and sellers through deals in the $5 million to $50 million range.
Financial buyers — private equity firms are a good example — tend to be “agnostic,” Cyliax explained, running a variety of companies across different industries. Their strengths are deploying capital and growing businesses. And they often have plenty of capital to invest.
“[They] typically look at much more of the mathematical equation. How much can they borrow money for, how much can they grow [the business], what are they spending, and what can they sell it for?” Cyliax said.
A strategic buyer takes a different approach, usually focusing on one or two industries and looking to acquire companies in a similar or adjacent space. They aim to identify synergies between the businesses that help both companies grow faster than they would separately.
“Strategic buyers see some benefit of buying the company, either a service they don’t have, a client base they don’t provide services to, a geography they’re not currently in, or the company they’re acquiring has a skillset or intellectual property or people they don’t have,” Cyliax said. “They typically value it higher than a financial buyer would, and they’re in it for the long haul.”
Examples of strategic buyers vs. financial buyers
One concrete example of a strategic acquisition is The Hustle’s sale to Hubspot in 2021.
The Hustle is a newsletter business that had 1.5 million email subscribers when it was acquired by Hubspot, a marketing software company. As founder Sam Parr explained on our podcast, while The Hustle brought in good revenue, it would bring in far more revenue when combined with HubSpot, because HubSpot could sell its product to The Hustle audience.
The acquisition was strategic because in this scenario, one plus one equaled more than two; both assets became far more valuable when combined. HubSpot ended up paying more than $20 million for the media company, Parr said on our podcast. (The exact sale price was not disclosed.)
Now for an example of a financial acquisition.
Laura Roeder sold MeetEdgar, a social media scheduling tool, in 2021. It was acquired by SureSwift Capital, a private equity firm that buys and then operates SaaS (software as a service) businesses.
“Strategic acquisitions generally do have a higher multiple, if you can get one, but we hadn’t really had strategic interest,” she said on our podcast. A financial buyer was a better fit, she said, because “we are a profitable SaaS company.” MeetEdgar sold for 7 figures.
The acquisition was, of course, strategic for SureSwift in some ways, even though we’d classify them as a financial buyer. They own and operate a number of other software companies, so they can use the people and procedures they’ve already built to continue to grow MeetEdgar.
Now the big question…
Which type of buyer is willing to pay more for your business?
Here’s the quick-and-dirty answer to that question: Strategic buyers tend to pay more than financial buyers.
That’s because, as we mentioned above, your company is likely worth more to a strategic buyer than it is to a financial buyer.
A financial buyer likely sees a path to increasing revenue over time by creating efficiencies, improving the product, or investing in growth marketing.
A strategic buyer, however, sees a way to use your company to immediately and drastically increase the value of its overall business. In other words, the value of both businesses increases when combined.
Because the strategic buyer sees a way to use your business to generate significantly more revenue than it did pre-acquisition, the value of your business is likely higher to the strategic buyer than it is to the financial buyer.
That’s why most sellers will look for a strategic buyer before opening the doors to a financial buyer — or seek out a strategic buyer after being approached unexpectedly by a financial buyer. The perceived value of the company is higher through the lens of a strategic buyer, which means a strategic buyer will likely pay more for your company than a financial buyer.
It’s also why you should aim to get more than one offer for your company. The first offer you receive, especially if it’s unsolicited, might not be the best offer. Depending on how the buyer plans to use the company after acquisition, your business might be worth more to someone else.
However, while a strategic buyer might pay more for your business, here’s a compelling reason to choose a financial buyer: They’re more likely to offer another payout in the near future, a “second bite at the apple,” Cyliax said.
Here’s why. Say you sell the majority of your company to a financial buyer, but retain 20% ownership and stay on board in some capacity. The financial buyer’s goal is to grow your company over the next three to five years, then sell for not only a higher price, but possibly a higher multiple as well. That could set you up for a second payday.
Regardless of what type of buyer expresses interest, understanding the motivations behind that interest will put you on track to maximizing the value of your business.