Selling to The Right Acquirer
Understanding the various types of acquirers is crucial to maximizing the value and success of a transaction. This guide will shed light on the most common buyer types and provide insights into each one. These buyers can be individuals or a part of a company or investment organization.
Different Types of Acquirers
Financial
Financial buyers are driven by maximizing the return on their investment. These include private equity funds, family offices, holding companies, and other investment entities seeking a return on their investment.
They typically look for companies with strong growth potential, stable cash flows, and promising opportunities for increased profitability. While not all financial buyers are created equal, all measure success by their financial returns performance.
Pros:
Access to Capital
Expertise in maximizing returns
May provide strategic guidance
Can bring significant co-investment / capital as part of acquisition
Can be more flexible in structuring deals to align interests with management
Will often keep current owners and management in place with incentives
Cons:
May prioritize short-term gains over long-term value
Less likely to contribute operational expertise
Potential for aggressive financial leverage or restructuring (e.g. high levels of debt-burdened on the business as part of the acquisition)
Employee security may be secondary to investment performance
May tie up key executives (including the owner) with employment agreements for an extended period - as short as six months but can be as long as the hold period (5-7 years)
Strategic
Strategic buyers acquire businesses to enhance their own operations, achieve synergies, or enter new markets. This category includes both private and public companies with significant operations in or adjacent to the industry of the acquisition target. They often seek businesses that align with or extend their core operations, offering synergies that can result in increased efficiency or expanded market presence.
Pros:
WIl most often pay the highest price
Potential for long-term value creation
Access to operational expertise
Enhanced market positioning and competitiveness
Often offer a “Second Bite at the Apple” (A carried interest for the seller in the company)
Cons:
Potential for cultural clashes between acquiring and target companies
Executive and management team may be at risk due to “redundancies”
Equity packages may not be “liquid” (difficult to value and sell)
Regulatory hurdles and scrutiny may delay or prohibit deal closing
If there is an “earnout” component, the value of the acquisition may be contingent on the owner/executive team staying for an extended period
Hybrid
Hybrid buyers blend elements of both financial and strategic acquirers. This category includes private equity-backed companies within specific industries and entities known for executing "roll-up" strategies. They aim to combine financial returns with strategic benefits, seeking businesses that offer growth potential while fitting into an overarching strategic vision.
Pros:
Often offer significant growth post-acquisition, either organically or inorganically as the buyer executes on additional acquisitions and growth levers
May offer higher bids than a traditional financial buyer
Can offer executive and management teams lucrative employment opportunities
Cons:
The balance between financial and strategic goals can be challenging - still beholden to financial returns
Integration complexities similar to those faced by strategic buyers
May not have a “clear” vision for the future
Conclusion
Each acquirer type brings a distinct set of priorities, preferences, and potential advantages and disadvantages. Recognizing the differences enables sellers and their advisors to confidently prepare negotiation strategies and achieve favorable outcomes.
