Financial vs. Strategic Buyers

Robert Buchanan, ASA, CFP®

Financial vs. Strategic Buyers

Bob Buchanan
National Practice Leader, Business Transition Planning
Comerica Wealth Management

Financial vs. Strategic Buyers: Why Selling to a Strategic Buyer Might Make Sense for Your Business

 

KEY TAKEAWAYS

  • Understanding how much money you will need to live your life is essential.
  • Strategic buyers can achieve some synergistic value by purchasing your company.
  • Transaction structure is critical.

There are many ways to transition from your business. Many owners wish to keep their companies in their families or transfer ownership to employees. Others hope to sell their businesses and capitalize on the value they have created. If your goal is to sell your business, considering a strategic buyer may make sense in some cases.

WHAT ARE FINANCIAL VS. STRATEGIC BUYERS? 

Strategic buyers — as opposed to financial buyers (usually private equity groups) — are generally buyers in the same (or a related) industry that can achieve some synergistic value by purchasing your company through cost savings or revenue enhancements. An example might be a company that sells a product or service that is complementary to yours and could benefit the buyer by accessing your customer base. Another example is a competitor seeking to expand geographically. The key is that this type of buyer can realize value greater than your company’s current value solely by acquiring your operations.

In contemplating whether selling to a strategic buyer is an acceptable option for you, there are a number of questions to consider, including:

  • What are your financial needs?
  • What are your non-financial objectives?
  • How will the transaction be structured?

ASSESSING YOUR NEEDS AND OBJECTIVES 

As with any business transition conversation, the first place to start is your personal financial needs. Understanding how much money you will need to live the remainder of your life in the manner you wish is what should drive all subsequent decisions. If selling does not provide you with sufficient proceeds, other alternatives should be considered. The best way to know how much money you need and whether a sale will meet that financial requirement is to engage in personal financial planning.

Once you know with relative certainty that selling your company will provide for your financial needs, it is prudent to consider your non-financial objectives. These could include your continued involvement with the business, providing for children, providing for employees, protecting your company’s legacy or reducing your risk. Identifying and addressing your non-financial objectives is an important step in determining what transition option is best for you.

OVERCOMING POSSIBLE CONFLICTS 

Strategic buyers often make a series of changes to the business, some of which may conflict with your goals. For example, strategic purchasers are unlikely to keep all of your key employees. One of the synergies from which strategic buyers often benefit is the ability to absorb certain functions into their existing workforce, and the cost savings related to the elimination of duplicative employees creates immediate additional value.

Likewise, strategic buyers may eliminate locations that overlap with their current operations. Entering a transaction without a full understanding of the potential ramifications may leave you disappointed in the result. On the other hand, if your goal is to sell and immediately walk away with no further responsibility to the business, selling to a strategic buyer might be a good fit.

CONSIDERING THE STRUCTURE OF THE TRANSACTION 

Transaction structure is another subject that should be well contemplated. Transaction structure includes what you are selling along with payment terms and timing. Will the payment be made in cash or the stock of the acquiring company? What is the timing of the payment? Will you receive everything at closing or will some of the proceeds be paid over time? Will the payments be contingent on the business meeting performance goals?

All of these questions are important, and each has implications for areas such as personal tax planning, estate planning and risk. Understanding the structure is crucial in considering a sale.

“The key is to plan ahead so that you understand the balance between qualitative and quantitative, know how each is affected by the transition option you are considering, and how each affects your personal planning.”

NAVIGATE THE SALE TO A STRATEGIC BUYER WITH COMERICA 

The process of transitioning from your business can be overwhelming, and for many business owners, the thought of selling their businesses to third parties is terrifying. Even knowing where to begin can be difficult.

The most important thing is that you do begin and plan as much as possible so that when the time comes, you’re ready. For some, selling to a strategic buyer may be the best way to transition and meet their goals, both financial and non-financial. The key, as with all transition decisions, is to plan ahead so that you understand the balance between qualitative and quantitative considerations, know how each is affected by the transition option you are considering and how each affects your personal planning.

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Want to know more?

For more information about transitioning to your management team, key employees, or any of the many other alternatives that may be available to you, please contact your Comerica Relationship Manager or a Comerica Wealth Advisor today.

June 21, 2022
Senior Vice President and National Practice Leader at Comerica Bank

Robert Buchanan, ASA, CFP®

Senior Vice President

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NOTE: IMPORTANT INFORMATION

This is not a complete analysis of every material fact regarding any company, industry or security. The information and materials herein have been obtained from sources we consider to be reliable, but Comerica Wealth Management does not warrant, or guarantee, its completeness or accuracy. Materials prepared by Comerica Wealth Management personnel are based on public information. Facts and views presented in this material have not been reviewed by, and may not reflect information known to, professionals in other business areas of Comerica Wealth Management, including investment banking personnel.

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