When you plan to sell your business, you might wonder, “Who will purchase my company?” One type of buyer is the strategic buyer. A strategic buyer is typically motivated by the strategic advantages and synergies they can achieve by acquiring your business. These buyers often possess assets that can become more valuable through the integration of your firm, and they may already operate in similar or related industries. They aim to be well informed, and in most cases they will find you. Strategic buyers undertake research into the target industry, and will likely be talking to multiple firms about acquisition. What sets these types of buyers apart is that they prioritise more than just the financial return on their investment, and take a longer term view of their portfolio.
Strategic buyers are attractive to you as an owner because they can unlock additional value in your business compared to other buyers, and as a result, they might be willing to offer a higher price if necessary. However, the fact that they recognise greater value doesn’t guarantee they will pay a higher price.
We differentiate between strategic buyers, who seek strategic advantages, and financial buyers, who are primarily interested in the return on investment when acquiring your business.
Understanding why someone might perceive the value of your company differently can offer valuable insights into areas of your business that may benefit from focused attention or investment before selling. It also helps identify aspects you should emphasize to potential buyers.
Synergies
The most frequently mentioned factor that appeals to strategic buyers is the realization of synergies within their portfolio, often described as 1+1=3. Your company becomes more valuable to them due to these synergies than to other potential buyers, including yourself. These synergies can lead to cost savings in the supply chain, increased sales revenue and margins, or improved operational efficiencies. For instance, you may have negotiated favorable supply terms they wish to leverage, expand their market share, or possess advanced internal technology that provides a competitive advantage.
Market Expansion
Another strategic benefit of acquiring your business is the opportunity to expand into new geographical markets or enter new product or service segments. The buyer acquires your market presence, allowing for diversified revenue streams and reduced execution risk.
Diversification can itself be the strategic goal. Your business might offer products or services that complement their existing portfolio, reducing their reliance on a single product or market.
Vertical Integration
Examining a firm’s supply chain, both upstream and downstream, can reveal strategic opportunities. Acquiring a supplier can enhance the assurance of essential input supply and hinder competitors. Owning the distribution network enables the buyer to prioritize their product sales. This strategy can enhance supply chain control and cost reduction.
Management Capability
In some cases, buying a firm is the best way to assemble an experienced, capable management team and workforce. While this has some risk if these new employees leave, it can nonetheless be an effective way to compete on talent in a constrained market.
Technology and Innovation
A strategic buyers may be interested in acquiring your company because of something you have created or perfected in-house. Your intellectual property (IP) may enable the buyer to enhance their own product offerings or competitiveness. This is also occasionally used as a work-around for IP infringement by the buyer.
Access to Your IP Portfolio
If you have valuable IP, and the buyer can’t acquire or licence that separately from you, they might be forced to buy the firm. I have seen deals where the target was acquired for its brand and domain name, and to access in-house developed software capabilities (both the dev skills and the system as a whole).
Access to New Customers
If your customer base can be integrated, a buyer may see this as a more cost-effective – and faster – way to gain access to new customers and cross-sell their other products or services.
Backdoor Entry
If there are significant barriers to entry to your market, you may be a target for acquisition from a buyer seeking entry. Rather than facing the risk and expense of getting established in the market, buying into the market may offer a better proposition and ROI.
Brand Enhancement
If you have a strong brand presence, you can use this to effectively lock others out. Watties proved a formidable brand against the likes of Bird’s Eye and Heinz in the New Zealand market. To break the barrier, Heinz acquired Watties to gain access to New Zealand grocery shelves for its products.
Future-Proofing
Strategic buyers may be motivated to buy your firm by a desire to stay ahead of industry trends or disrupt existing markets. They might see your business as a way to stay competitive in a rapidly changing landscape. This is a key reason that established firms buy startups.
Beachhead
This is a common strategic buyer approach seen in the New Zealand market, and also by New Zealand firms entering new markets. Buy a local company to provide the infrastructure and cash flow to support a sustained presence to grow the market with the buyer’s other product lines.
Operational Efficiencies (aka Cost Reductions)
The buyer may have excess capacity that can be used to streamline your operations, eliminating duplicate functions and roles, and therefore achieving improved economies. The buyer can lower their marginal cost, get a better ROI on their existing investments, and reduce overall costs.
Operational efficiencies can also arise when your business is underperforming. If the buyer can retool your business processes with their proven methods, they can increase the performance of the business overall. There are instances where this has happened in reverse: the acquiring company retooled their systems to use that of the smaller, but more capable, acquisition target.
Buying Capacity
You may have an excess of something that your buyer is short of. I have seen this in industries as diverse as confectionery manufacturing, data centres, and outsourcing providers.
Competitive Advantage
In this sense, the competitive advantage can be through the combination of the firms that unlocks a new source of competitive advantage, or ‘a diamond in the rough’ – hidden value in your firm. Acquiring a competitor or a complementary business can give a strategic buyer a competitive advantage in the marketplace, allowing it to offer a broader range of products or services. Or, if you don’t appreciate the value of something your firm is capable of, but your competitor does, they buy you to exploit your capability.
Competitive Block
Your business may be strategically valuable to a buyer because it serves as a barrier preventing another party from acquiring it. The buyer may argue that, even if they take no immediate action with your business, it’s preferable for them to own it rather than letting it fall into the hands of a competitor.
Regulatory Adventages
In some cases, strategic buyers may be interested in your business due to regulatory advantages. Your company might hold licenses, permits, relationships, or regulatory approvals that are more valuable to them than they are to you, allowing them to enter or operate in a specific market more easily.
Listed Company Multipliers
This reason is not so much a strategic benefit but a common acquisition purpose dressed up as strategic. Listed companies can often raise funds at a lower cost than other firms, or even use their shares as currency. Any additional EBITDA they add to their bottom line increases (theoretically) their market capitalisation by that additional EBITDA times their P/E multiplier. If they buy your company at a multiplier less than theirs, they can see an immediate bump in share value. Sometimes, it is cheaper (and easier) to acquire earnings than to grow organically.
And They’ll Pay More?
As a general rule, you can’t expect a strategic buyer to pay more for your business solely because of what they might be able to do with it afterwards. Their upside is theirs. They are taking the risk of not only buying your company and integrating it into theirs, but also the risk that the strategic benefits do not come to pass.
Where you can leverage a strategic buyer is in an auction-like situation – where you have multiple offers for the business at the same time. A strategic buyer – seeking those additional, synergistic benefits – can typically see more value than other classes of buyers, and therefore their price ceiling is higher. Using an auction to bid the price up applies across all buyer types, but having at least one strategic buyer in the mix should pay dividends.
A caution, however. You mightn’t be able to tell if an interested buyer is a strategic or financial buyer. They probably won’t tell you. They are not going to announce the strategic benefit of your firm to theirs as that will drive your price expectations upwards.
And a final note: small business owners rarely attract strategic buyers. You don’t have the size to make the deal worthwhile, and the synergy value is very low. It will cost them more to buy you than they will get out of the deal.
We have covered a litany of reasons why you might be targeted by a strategic buyer – and there are others that are less common, but could be on this list. Sometimes the strategic benefit to the buyer is a mix of the reasons above. Sometimes it is as simple as taking you out as a competitor.