Financial Buyer
Good news: Interested in a company’s return on equity, investment burden and future cash flow. They are long-term investors and are looking for a well-managed company. They will quickly execute an acquisition.
Bad news: They are looking for a good ROI and will usually try to drive down the acquisition price. For example, they may see no value in buying a company for 6X EBITDA if they feel they can sell it for only 8X EBITDA in a few years.
Definition: A (financial buyer is a) type of buyer in an acquisition that is primarily interested in a company’s return on equity, investment, burden on management and cash flow. To determine this information, a financial buyer will carefully look over a company’s financial statements and assets. A financial buyer is typically a long-term investor looking for a solid, well-managed company. Financial buyers rarely make any immediate changes, except in turnaround situations where companies are not currently profitable.
Many everyday retail investors could be considered financial buyers. An investor taking either a value or growth approach to investing over the long term is following many of the same strategies that large financial buyers do.
Another example of a financial buyer is a former executive looking to purchase a job by finding a company to manage or turn around; alternatively, he or she could just be holding companies looking for a good return on investment and plan to keep current management in place (Investopedia.com).
Some differences between a strategic and financial buyer
Evaluation of your business
Strategic Buyer
How your business will tie in with their existing business. Focused heavily on synergies and integration capacities
Financial Buyer
Evaluate the opportunity as a stand-alone entity. Often buy businesses partially with debt. They scrutinize the business’ capacity to generate cash-generating capabilities
Merits of the industry
Strategic Buyer
Knows a lot about your industry, its competitive landscape and current trends
Financial Buyer
Is not as familiar with your industry. Will spend time on the macro view of your company and its industry. Will spend a lot of time on the risks of a given industry
Back-office Infrastructure
Strategic Buyer
Is not as interested in the back-office because these costs will be eliminated after the sale. The seller should not make this an important part of the sale
Financial Buyer
Needs your back-office infrastructure and will scrutinize it heavily during due diligence. The seller should make this an important part of the sale
Investment Horizon
Strategic Buyer
Intends on owning an acquired business indefinitely, often fully integrating the company into their existing business
Financial Buyer
Plans on selling the business in four (4) to seven (7) years. See no value in buying a business for 8X EBITDA if they can only sell it for 6X EBITDA five years later. They are looking for a good ROI
Transaction Efficiency
Strategic Buyer
Strategic investors may take a long time due to slow-moving boards of directors, bureaucratic committees, etc.
Financial Buyer
Financial buyers are in the business of making acquisitions. It is one of their core competencies to execute deals in a timely fashion