Strategic Buyer

What is a Strategic Buyer?

A strategic buyer is a buyer who is already operating in the same industry as the company he’s trying to acquire. Often, strategic buyers are competitors, suppliers, or clients of the acquisition target. The strategic buyer’s main goal 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 great value from such acquisitions, they are usually ready to pay top dollar to close the deal.

Breaking down Strategic Buyer

A strategic buyer is frequently a competitor in the same 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 distribution.

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 as 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 result in a negative impact on employees, as redundant positions can be eliminated. A significant portion of cost savings often arises from retrenching staff. There is no point in employing two chief financial officers, as they perform identical functions. Similarly, the number of selling and marketing staff can be reduced, and some mid-level managers can be eliminated.

Advantages of Selling to a Strategic Buyer

Strategic buyers are preferred to financial buyers, and for good reasons. This is particularly true 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 in the same industry he is operating in. In doing so, this buyer realizes more synergies resulting from the two companies. This, in turn, leads to a higher return on investment and an increase in the value of the original business. Therefore, 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. This means that the acquisition process is conducted more swiftly and efficiently, usually with very few hitches. It does not mean that the acquirer won’t bother scrutinizing the target company’s books. What it does mean is that they’ll be able to do it much faster than a buyer unfamiliar with the industry could.

3. More certainty of closing

As the strategic buyer understands the target company’s structure, there will be very few surprises, if any. This means that there’s a very high probability of the deal going through.

4. Better opportunities for clients

With a strategic buyer, the new company owners will be able to offer a wider range of products and services. In fact, they may even offer your clients products of higher quality. This 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 has a greater assurance that his business will be in good hands for the future. This is contrary to financial buyers, who commonly end up selling the business just a few years down the line.

6. Improvement in decision-making

A financial buyer makes decisions by prioritizing the interests of the business’ investors. 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 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 this is that they view their investment as having solid, long-term value for their overall business enterprises. Unlike a financial buyer, a strategic buyer is more interested in seeing his acquisition be an ongoing successful business, as opposed to merely seeking a quick return on his invested capital.

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 learning and advancing your career, the additional CFI resources below will be useful:

• Buy Side vs Sell Side M&A
• Diversification
• Mergers & Acquisition Process
• Roll Up Strategy