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What's the difference between selling to a strategic or a private equity buyer?

The two most common investors/buyers are strategic buyers and financial buyers, such as private equity groups. To determine the best buyer, owners should familiarize themselves with the difference between the two.
 

Strategic Buyers:

Strategic buyers may be direct competitors looking to expand market share or obtain proprietary advantages. They sometimes will pay premium values for cumulative gain but may offer weaker valuations if they already possess the industry connections and IP you are offering. Premium values 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 distribution channels or customers.
  • Strategic buyers usually expect to buy 100% of the company, thus the seller has no opportunity for equity appreciation.
  • Owners seeking a quick transition from the business can expect to be replaced by an experienced individual from the buying entity.
  • Strategic investors will consider companies of almost any size. However, most prefer to do larger rather than smaller deals ($5MM to $100MM+ transaction size).
  • Owner must accept the reality that strategic buyers may relocate the business and/or eliminate loyal employees.
Private Equity Groups (PEGS):

Private Equity Groups or PEGs are fast becoming the buyer of choice. Some PEGs manage funds over US$50 billion. They focus on investing and tracking those investments, and most have no desire to oversee the daily operations of the businesses they own. Further, these flexible investors customize the buyout around the owner’s preferences. Other matters to consider:

  • PEGs provide funding to retire inactive shareholders, finance a generational transfer, or facilitate a management buyout.
  • The primary investment tool PEGs utilize is the financial recapitalization. In trade for company stock or assets the owner receives immediate liquidity. Usually the owner and PEG both want the owner to retain a portion of equity to sustain ongoing interest and future appreciation.
  • To customize the best transaction PEGs will buy minority or majority ownership by providing or buying equity.
  • Transactions with PEGs are more of a “partnership” than an outright sale of the company. 
  • Owners typically receive cash for 80% of the current market value of the company. PEGs even provide the owner partial financing to leverage their remaining 20% equity into 35-40% equity ownership. See here for a recap example.
  • After three to seven years the owners experience the “second bite of the apple”. Sale of the remaining minority stock often exceeds the cash received at initial sale.
  • PEGs support growth then usually sell the company within seven years. The sale normally goes unnoticed by the public, yet the sale results in another equity payday for key managers as well as additional equity shares.
  • 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 provide valuable advisory and sounding-board roles to owners and management teams. 
  • Because of their network, PEGs help locate and recruit talent to help solve long and short-term challenges.
  • PEGs will provide growth capital along with strategic and merger and acquisitions assessments, often acting as a company’s corporate development partner.

Identifying up front the owner’s vision and ideal buyer type diminishes the emotions and complications of selling your business. M&A professionals like those at IndustryPro have ongoing relationships with Strategic, PEG, and Individual buyers, and we are happy to help determine the best fit for your situation. Contact us for more information.

IndustryPro  |  117 Towne Lake Pkwy. Suite 310  |  Woodstock, GA 30188  |  Phone: 866.531.7170  |  Fax: 801.999.7189  |  support@industrypro.com
 
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