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Industry Insights

Strategic or Private Equity Buyers?

The two most common types of buyers are strategic buyers and financial buyers such as private equity groups. To help understand which is the best fit for them, sellers should familiarize themselves with the differences.

Strategic Buyers:

Strategic buyers are typically larger companies looking to expand their product or service offering, technology, market share, geography or obtain other proprietary advantages. Strategic buyers will value their potential acquisitions based on the overall value to the buyer and tend to be less financial-focused than Private Equity buyers.  Premium valuations may reflect anticipated increases in revenues, savings from operation consolidation or other synergistic benefits. Here are some other matters to consider when considering a strategic buyer: 

  • Strategic buyers may have complementary products or services that share common customers, sales, marketing and distribution channels. 
  • Strategic buyers usually expect to purchase 100% of the company with a portion paid at closing and a smaller portion paid out over the next few years. 
  • Whether or not individual management team members are needed post acquisition very much depends on the buyer and their current personnel. 
  • Strategic buyers will consider companies of almost any size. However, most prefer to do transactions above $5MM in size. 
  • Being acquired by a strategic buyer is a much slower process than being acquired by a Private Equity Group as strategics must form a consensus internally among a large number of individuals. 

Private Equity Groups (PEGS):

  • A Private Equity Group is a relatively small organization as compared to a strategic buyer and as a result can close acquisitions in a short period of time. PEGs are flexible regarding structure and may or may not utilize debt in the transaction. PEGs may acquire 100% of a company or much less depending on the PEG’s overall strategy. 
  • PEGs can also provide funding to retire inactive shareholders, finance a generational transfer, or facilitate a management buyout. 
  • The primary investment tool PEGs utilize is financial recapitalization. In trade for company stock or assets the owner can receive immediate liquidity. Often the business owner and PEG may want the owner to retain a portion of equity post acquisition to sustain ongoing interest and future appreciation. 
  • Transactions with PEGs can be more of a “partnership” than an outright sale of the company with some owners receiving cash for 60-80% of their holdings and retaining the remaining portion in equity. 
  • PEGs can even provide the owner partial financing to leverage their remaining equity into a larger equity ownership via a “recap” structure. 
  • After three to seven years the owners may experience a “second bite of the apple” when the PEG sells the company or it “goes public”. Sale of the original owners remaining minority stock can often exceed the amount received at the initial sale. 
  • PEGs support growth and then typically sell the company or take it public within seven years resulting in another equity payday for key managers and other equity shareholders. 
  • Most PEGs avoid day-to-day operations of a business. As majority owners and board members, they do track performance and expect corrective action if the company falls too far off plan. 
  • PEGs can provide valuable advisory and sounding-board roles to owners and management teams. 
  • Though of their extensive networks, PEGs can help locate and recruit talent to help solve long and short-term challenges. 
  • PEGs can provide growth capital along with strategic and merger and acquisitions assessments, often acting as a company’s corporate development partner. 

Identifying up front the companies and shareholders vision and ideal buyer type diminishes the emotions and complications of selling a business. IndustryPro M&A professionals have ongoing relationships with strategic, PEG, and individual buyers, and we are happy to help determine the best fit for your situation. 

Engage an IndustryPro Advisor

We represent companies that have $5-$250M+ revenue. Please contact us to receive a no-obligation options analysis.

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