5 Differences Between Financial and Strategic Buyers

• October 7, 2021
• Richard Willis

When you try to raise funding for your business or you are in the process of preparing to sell it, it’s important to understand the differences between financial and strategic buyers. This will help you understand the prospective buyer’s process of making a decision and determine which option suits you best. For your convenience, we have listed five key differences between financial and strategic buyers.

1. Defining the Investment Value of the Industry

Financial buyers typically spend an extensive amount of time building a view of the industry and your company within that industry. They might even hire a consultant to assist them with an analysis that will help them determine whether they want to invest in any company in the given industry in the first place.

In contrast, strategic buyers most likely already know everything about your industry and its current trends. They tend to spend less time evaluating the industry and focus more on the integration capabilities of your business.

2. Evaluation of the Business

Financial buyers are usually not planning to integrate your business into a larger company and evaluate the opportunity as a stand-alone entity. They are mostly interested in increasing the long-term value of the company quickly in order to ensure the desired return on their investment. Strategic buyers, on the other hand, will evaluate acquisitions based on how the business would fit in with their existing company.

3. Back-Office Systems

Financial buyers focus more on the chosen company’s existing back-office systems and their strength because they will need it to endure. Strategic buyers, however, are not as interested in this because these functions will typically be removed and replaced during the integration process.

4. Transaction Efficiency

When it comes to the efficiency of transactions, strategic buyers can often be slowed down by territorial division managers, bureaucratic committees, and the acquisition checks against internal projects, among many other things. Financial buyers are essentially in the business of making acquisitions, so executing deals in a timely manner is one of their fundamental abilities.

5. The Investment Horizon

Financial buyers often have an investment time horizon of around four to seven years. The period of time during which they acquire the business and plan the exit, will have a key impact on the return on their investment. On the flip side, strategic buyers plan on owning the business for an indefinite period of time, so they are less sensitive to business cycle risks.