In an earlier article, we discussed the motivations of Strategic Buyers. Now, we turn our attention to Financial Buyers.

What Financial Buyers Want

We’ve already highlighted that Strategic Buyers focus on synergies & integration capabilities, looking at how an acquisition will provide long term value to them.  For example, accessing new customers,  geographies or intellectual property.

Financial buyers, on the other hand,  evaluate businesses as stand alone entities. The object is to obtain a return on their investment, often within a 3-5 year time period.

Many financial buyers fund their acquisition partially with debt, so they will scrutinise the business’ capacity to generate cash flow to service the debt.

Understanding Financial Buyers

• Financial buyers are interested in the return they can achieve by buying your business.
• The cash flow of your business & future exit opportunities are critical
• They will grow cash flow through revenue enhancement, expense reductions, or acquiring other businesses (known as roll-ups)
• They tend not to take on day to day management. Often, they’ll keep the owner & original management team in place.
• They may provide additional working capital, & pull out net profits as dividends. They’ll make sure management earns the salary & variable compensation they require to stay committed & motivated.
• They’ll be interested in your past & forecast EBITDA
• They’ll be looking for key value drivers in your company & have an eagle eye out for risks.
• They will not want to provide capital to fix operational problems, replace the entire management team, or address major systems & logistics glitches post-acquisition

Remember:

The financial buyer is buying cash flow. Less friction = more flow.

Who are they?

Private equity firms

These are professional investment management firms that invest in or acquire private operating companies through a variety of strategies including leveraged buyout, venture capital, & growth capital.

Holding companies

These firms exist simply to own other companies, which become subsidiaries of the holding company. One of the most famous examples is Warren Buffet’s Berkshire Hathaway - it has 100% ownership of over 60 different companies ranging from Geico to Fruit of the Loom, & partial ownership in many more.

Family office

These are wealth management professionals who perform centralised management & oversight of investments for very wealthy families.

Unlike a private equity firm with its limited window to own a company, a family office may be looking to own your company indefinitely, withdrawing annual profit as dividends as part of a larger strategy to diversify clients’ income streams.

Individual investor

Just like it sounds, these are high net worth individuals who see value in your company’s ability to provide them with long-term cash flow.

There you have it, if you want to sell your business to a financial buyer, it’s worth understanding the motivations they may have. If you know how your business fits into the strategy of an acquirer, you’ll achieve a much better outcome.