Strategic Buyer vs. Financial Buyer - How Are They Different
You've built a great business, and now it's time to sell. But who should you sell to - a company already in your industry looking to get bigger? Or an investment firm focused purely on making money?
The buyer you choose can significantly affect how much you walk away with.
In this guide, we'll break down the key differences between strategic buyers (companies in your field) and financial buyers (investment firms and funds).
Selling your life's work is a big deal. Understanding strategic vs. financial buyers is step one to ensuring you get the maximum value and best fit for your exit.
TL;DR - Strategic vs. Financial Buyer
Before we dive deeper, let's quickly summarize the core differences between strategic and financial buyers.
Strategic Buyer | Financial Buyer |
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Strategic buyers are operating companies in the same or a related industry looking to expand through acquisitions that align with their business goals. They seek to acquire businesses that complement or expand their existing operations. | Financial buyers are investment firms focused on acquiring companies to generate returns for their investors. They focus on maximizing the value of the investment through operational improvements and eventually resell at a profit. |
Pros | Pros |
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Cons | Cons |
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Best For | Best For |
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If you're a business owner thinking about selling your company, Exitwise can guide you through the process of determining the right buyer fit and maximizing your valuation.
We can help you interview and hire the right M&A advisors by introducing you to top experts (investment bankers, M&A attorneys, and tax accountants) specialized in your industry. With the experts we hire, our clients sell for 28% more than the market.
Schedule a free consultation with our advisors to learn how Exitwise can help get you the maximum value for your life's work.
What is a Strategic Buyer?
A strategic buyer is a company that acquires another company in a similar industry to capture potential synergies. The goal is to integrate the purchased company into their existing operations to create more value together than separately.
For example, a technology company may acquire a smaller tech firm to acquire its product offering and integrate it into its platform. Or a manufacturer might purchase a competitor to consolidate and increase market share.
Strategic buyers can pay higher premiums because they can capitalize on synergies like enhanced distribution, expanded customer base, reduced costs, and more. Their focus is on the long-term fit rather than just financial returns.
A prime example of a strategic acquisition is T-Mobile's $26.5 billion purchase of rival Sprint in 2020, combining two of the largest wireless carriers in the US. According to reports, the merger aimed to create a stronger competitor against AT&T and Verizon by expanding their customer base.
Important: Strategic buyers can face regulatory hurdles, as seen when the FTC blocked Microsoft's attempted acquisition of gaming giant Activision Blizzard in 2022 over concerns of reduced market competition.
How Does Strategic Buying Work?
Strategic buyers evaluate potential acquisition targets based on how well they fit into their overall business strategy.
They are interested in identifying companies that can provide synergies, which are the potential cost savings or revenue enhancements that can be achieved by combining the two businesses.
The buyer evaluates criteria like:
Product, technology, and IP strengths
Market share and growth potential
The management team and talent pool
Potential revenue and cost synergies
Brand equity and customer loyalty
Once a target is identified, the strategic buyer develops a thesis about how acquiring the company supports their strategic goals. This could involve entering a new market, acquiring technology, or eliminating a competitor, among other things.
The buyer conducts due diligence to estimate synergies and develops an integration plan pre-close. This allows the strategic buyer to pay a premium price to win desirable deals.
Post-acquisition, the strategic buyer implements the integration plan to capitalize on synergies. This may involve merging teams, operational consolidation, or migrating customers to unified systems.
The target company is fully absorbed into the acquiring company's structure and systems.
Note that there can also be potential layoffs of mid-level managers during strategic buying, as there is no need for two CFOs, and the selling/marketing team can be reduced. This occurs because of the overlaps or overfill of a lot of positions.
What is a Strategic Buyout?
A strategic buyout is the acquisition of one company by another company operating in the same or related industry.
The goal is to achieve strategic objectives like:
Gaining market share
Expanding into new markets
Acquiring talent and technology
Increasing production capacity
Unlike financial buyers who acquire companies as investments, strategic buyers aim to obtain complete control of the target company and integrate its operations long-term.
For example, Facebook's acquisition of Instagram for $1 billion in 2012 was a strategic buyout to expand its presence in the mobile photo-sharing space. Facebook leveraged its resources and user base to grow Instagram rapidly.
Investment Philosophy of Strategic Buyers
Now that we've defined what strategic buyers are, let's look at some of the guiding principles that shape their investment strategies when acquiring companies:
Focused on long-term value creation versus short-term returns.
Seek companies that fit their business model and strategies.
Willing to pay higher premiums for synergistic acquisitions.
Target full control through majority stake or complete buyouts.
Planning to hold companies indefinitely as part of core business.
Strong post-acquisition integration to capitalize on synergies.
What is a Financial Buyer?
A financial buyer is an investment firm that acquires companies to generate a return for its shareholders or investors. The companies purchased are treated as investment assets within a portfolio.
In recent years, private equity deals have surged, accounting for over 34% of global M&A activity by number and 38% by value. This demonstrates the growing appetite of financial buyers to acquire companies.
Financial buyers include:
Private equity firms
Sovereign wealth funds
Pension funds
Investment entities with pools of capital for acquisitions.
They raise funds from institutional investors, wealthy individuals, or even public markets.
Companies that financial buyers target don't necessarily have to be in industries they specialize in. Their primary goal is to improve financial performance and cash flows to sell the company profitably in the future.
How Does Financial Buying Work?
Financial buyers have an investment thesis guiding the types of companies they want to acquire, but it is generally broader than strategic buyers. They have a flexible mandate based on what they believe will provide good returns.
Standard criteria financial buyers analyze include:
Management competencies
Market leadership potential
Revenue and earnings growth
Cash flow generation
Capital structure
Financial buyers perform due diligence focused heavily on the target company's financial health and performance metrics. This helps them develop financial models to determine an appropriate valuation and expected returns.
Unlike strategic buyers, financial buyers typically do not have expertise in the specific industry of the acquired company.
Instead, they rely on their experience in financial management, operational optimization, and value-creation strategies to improve the performance of the acquired business.
Post-acquisition, financial buyers install new reporting and tracking systems. They may bring in their management expertise or streamline operations to improve profitability. Their eventual exit strategy is to sell the company via an IPO, secondary buyout, or strategic sale.
Financial buyers often use debt financing (one of the M&A financing techniques) to fund a significant portion of the acquisition cost, expecting that the acquired company's cash flows will be used to service the debt and generate returns for the investors.
Investment Philosophy of Financial Buyers
Financial buyers have their own set of philosophies that guide how they analyze and execute acquisitions to meet their investors' expectations:
Focused on achieving investment returns for their shareholders.
Flexible investment mandates spanning industries.
Seek majority or minority stakes aligned with fund strategy.
Often utilize debt and leverage to enhance returns.
Typical hold period of 3-7 years.
Exit through IPO, secondary sale, or strategic acquisition.
Relevant Characteristics Between Strategic Buyer and Financial Buyer
To better understand the differences between strategic buyers and financial buyers, it's helpful to compare their key characteristics:
Characteristic | Strategic Buyer | Financial Buyer |
|---|---|---|
Goals | Expand operations, increase market share, gain strategic advantages | Generate financial returns, maximize investment value |
Investment Horizon | Long-term, often indefinite | Short to medium-term, typically 3-7 years |
Financial Leverage | Often uses less leverage, relying more on existing cash reserves | Frequently uses significant leverage (debt financing) to fund acquisitions |
Return Expectations | Focused on long-term strategic benefits and synergies | Seeks high financial returns (e.g., 20%+ annually) |
Risk Tolerance | Relatively lower risk tolerance, as the acquisition is part of their core business | Higher risk tolerance, as investments are part of a diversified portfolio |
Exit Strategy | Rarely contemplates an exit, as the acquired company is integrated into operations | Actively plans for an eventual exit, such as a sale or IPO |
Navigating the complexities of selling a business to strategic or financial buyers requires expert guidance. Exitwise streamlines this process by introducing you to top M&A experts specializing in your industry.
Our easy three-step approach ensures you interview, select, and hire the right M&A deal team to maximize the value of your exit. We also prepare you for key meetings, provide strategic advice, and help you negotiate optimal terms.
Learn more about Exitwise's comprehensive approach to M&A and how we can help maximize your valuation.
Similarities and Differences
Although strategic and financial buyers have distinct motivations and investment strategies, they share some common attributes.
Financial Buyer and Strategic Buyer Differences
Let's summarize the key differences between financial and strategic buyers:
Investment criteria: Strategic buyers have specific criteria based on synergies; financial buyers have broader mandates.
Holding periods: Strategic buyers hold long-term; financial buyers exit within years.
Leverage: Financial buyers use more debt financing.
Deal structure: Strategic buyers favor full buyouts; financial buyers will take minority stakes.
Premiums: Strategic buyers pay higher premiums for synergistic deals.
Post-acquisition: Strategic buyers focus on integration; financial buyers install financial controls.
Strategic Buyer and Financial Buyer Similarities
Despite their differences, strategic and financial buyers do share some commonalities:
Both perform due diligence on financials, operations, legal, etc.
They have access to external financing from debt markets and banks.
Certain criteria like management strength and market position are essential to both.
Each has certain types of deals they are mandated or best equipped to do.
They consider various valuation methodologies, such as discounted cash flow analysis, comparable company analysis, and precedent transaction analysis.
All acquirers want to negotiate the best deal possible in the end.
So, while they have diverging end goals, the process of completing deals is similar for both buyer types.
What About a Technical Buyer?
In addition to financial and strategic buyers, a third category you may come across is a technical buyer.
A technical buyer is a company or individual that acquires another business primarily for its technical capabilities, intellectual property, or specialized expertise versus entering new markets or gaining customers.
These buyers are often interested in acquiring specific technologies, patents, or engineering talent to enhance their product offerings or research and development efforts.
Major technology companies are often technical buyers.
For example, Apple acquired popular headphone maker Beats for $3 billion in 2014 to integrate their audio technology and music services into Apple's iTunes and hardware offerings.
The goal was gaining innovative technology to improve their existing products versus expanding markets.
Technical buyers share aspects of both strategic and financial buyers. A technology acquisition can be highly strategic in gaining capabilities and have high return expectations based on sales potential.
Overall, technical buyers fall closer to the strategic end of the spectrum.
Bottom Line
Deciding between a strategic or financial buyer depends entirely on your situation and goals. Neither is inherently better than the other.
If you want to stay involved post-sale, you may prefer the operational expertise financial buyers provide. Those who want a clean exit may opt for strategic buyers.
There are many nuances to each deal that go beyond just the type of buyer. Exitwise simplifies the process by introducing you to specialized M&A advisors. We interview, hire, and manage your deal teams to run an optimized sales process, advise on key steps, and maximize your valuation.
Contact our advisors today to start the conversation about selling your company the Exitwise way.
Frequently Asked Questions (FAQs)
To summarize the key differences between these buyer types, here are answers to some frequently asked questions:
What are Strategic Acquirers?
Strategic acquirers are companies that acquire other companies to advance their business strategies and gain specific synergies. They aim to integrate the purchased company into their operations long-term.
What is a Strategic Investor?
A strategic investor is a company that invests in another company primarily for strategic reasons, such as gaining new capabilities, technology, or access to new markets. They are similar to strategic acquirers.
How Do Strategic and Financial Buyers Value a Business?
Strategic buyers value based on synergies created, while financial buyers focus on cash flows and earnings. Strategic buyers usually have higher value perceptions.
They may be willing to pay a premium for companies that can provide significant cost savings, revenue enhancements, or competitive advantages.
To get a quick estimate of what your business may be worth, you can use Exitwise's free valuation calculator. This simple tool based on your revenue and EBITDA can give you an initial sense of your company's value.
What Are the Long-Term Impacts of Selling to a Strategic vs. Financial Buyer?
Selling to a strategic buyer typically leads to full integration, while financial buyers run as investment assets. Strategic buyers tend to offer clean exits, whereas financials expect ongoing seller involvement.
