Who is a Strategic Buyer?
A strategic buyer is a type of buyer who is in the same industry as the company he’s trying to acquire. Often, strategic buyers are competitors, suppliers, or clients of the company. The buyer adheres to only one main goal, and that is to find a company whose products and services align with the operations of his own company.
Once the strategic buyer finds such an organization, he purchases it with the intention of integrating the purchased entity on a long-term basis. And since strategic buyers anticipate that they will get more value from such acquisitions, they are usually ready to pay top dollar to close the deal.
Breaking down Strategic Buyer
Essentially, a strategic buyer is a competitor in an identical industry as the target company. The “strategy” employed by the buyer is that he finds a company with potential for expansion. As such, strategic buyers are always looking for opportunities to venture into new product lines within the same industry, find new geographical markets, and secure more channels of distributions.
To illustrate the concept, consider a food manufacturer who specializes in processed foods. The manufacturer identifies an opportunity for exploring the organic food industry. As a result, he acquires an organic food business to serve consumers. This manufacturer is an example of a strategic buyer as he is acquiring a company within the same industry like his.
By acquiring the organic food business, the combined organization stands to benefit from top-line synergy. In fact, the acquisition generates production and distribution synergies while also boosting factory utilization.
By using the same resources and materials to produce organic food, the combined company benefits from a reduction in costs, especially redundant factory costs and office space. On the flip side, cost synergies also result in a negative impact on employees.
A significant portion of cost savings arises from retrenching staff. There is no point in employing two chief financial officers, as they perform similar functions. Similarly, the number of selling and marketing staff can be reduced, and mid-level management can be eliminated.
Advantages of Selling to a Strategic Buyer
Strategic buyers are preferred to financial buyers, and for good reasons. It is particularly so for owners of small and medium-sized companies. Here are a few reasons that warrant selling your business to a strategic buyer:
1. Higher value
As mentioned earlier, a strategic buyer purchases a business from the same industry he is operating in. In doing so, this buyer realizes more synergies resulting from the two companies. It, in turn, leads to a higher return on investment, and an increase in the value of the original business. For such reasons, strategic buyers are willing to pay more for a company because they won’t require the initial owners to help with most of the operations.
2. Faster closure of deals
Since a strategic buyer operates in the same space, he possesses a solid understanding of the company he wants to acquire. It means that the acquisition process is conducted more swiftly and efficiently with very few hitches. It does not mean that the acquirer won’t bother scrutinizing the target company’s books; what it means is that they’ll do it much faster.
3. More certainty of closing
As the strategic buyer understands the target company’s structure, there will be very few surprises, if there are any. It means that there’s a very high chance of the deal going through.
4. Better opportunities for clients
With a strategic buyer, the new company owners will offer a wider range of products and services. In fact, they may even offer your clients products of higher quality. It helps the acquired business to deepen its relationships with its clientele.
5. A long-term deal
By selling a company to a strategic buyer, the original owner is guaranteed that his business will remain in good hands for a lifetime. This is contrary to financial buyers, who end up selling the businesses a few years down the line.
6. Improvement in decision-making
A financial buyer makes decisions by prioritizing the interests of the business’ investors. Also, such a buyer ceases to invest in the acquired firm in the last few years. In contrast, a strategic buyer makes decisions based on the interests of all the key players – the shareholders, clients, and employees.
Bottom Line
Company owners acquire other businesses for a variety of reasons, such as growth, exploring new markets, making new products, or buying out of competitors. A strategic buyer acquires a particular company based on how well it fits into his present or future strategic plans.
Strategic buyers are often willing to pay a higher price for businesses that they want to acquire. One reason for such type of thinking is that they buy into the companies intending to hold onto them for the long term. Unlike a financial buyer, a strategic buyer is not very interested in getting a return on his capital as he is in the alignment of the two businesses’ operations.
More Resources
CFI is the official provider of the global Financial Modeling & Valuation Analyst (FMVA)™ certification program, designed to help anyone become a world-class financial analyst. To keep advancing your career, the additional resources below will be useful:
