Buyers of growth businesses broadly come in two flavours: strategic buyers and financial buyers (such as financial sponsors). Generally speaking, these two types of buyers are motivated by different objectives and therefore also tend to adopt a different approach to assess your business.
Understanding strategic acquirers
Strategic buyers are large corporate entities that pursue acquisitions for strategic reasons. In 2022 they have been particularly active in acquiring fast-growing and tech-powered competitors to digitalise their organisations (see Adobe’s $20bn acquisition of Figma for an example at the large end of the market).
They are interested in acquiring the target for a strategic region, such as its products or services offering, entering a new geography, moving up or down the value chain, or getting their hands on specific know-how. Therefore, their focus will be to grow the business or integrate it into their operations.
Financial sponsors aim to own your business for 5-7 years
Financial buyers instead are investors who are looking to make a return by reselling the target to another fund or company several years after it has been acquired, or even taking them public on the stock market.
These organisations invest from a pool of money that they have raised from a group of investors, referred to as their ‘limited partners’ when they set up their funds. Typically, they will agree to return the value of the fund (which typically aims to be 3x the value that they initially raised) to the limited partners within seven to ten years. The sponsor, who is responsible for investing the fund, will therefore have a clear date in mind by which they would like to re-sell the business.
Approaching strategic or financial acquirers
Given the different nature between strategic and financial buyers, you can expect that they will also adopt a different approach.
Financial investors are primarily interested in returns. As such, to improve their returns, they would likely introduce a degree of financial engineering to the deal and will almost always borrow capital to finance the acquisition and magnify returns.
The European private equity landscape has developed at a rapid pace over the last few decades. Provided that they have disposable cash available, that the deal fits within their investment remit and philosophy and that they like the target after a due diligence period, there is not much more that they would specifically require.
An important consideration for financial investors is that oftentimes they will want the management of the company to remain involved at a minimum for a transition period. In addition, management is likely to have the support of new investors, who will sit on the board and help with the strategic direction of the company (some more hands-on than others).
This could entail new product launches, international expansion, and financial structuring. They might also support a bolt-on acquisition strategy to accelerate inorganic growth. Moreover, management is likely to be incentivised for this with an options package and existing shareholders might have an opportunity to roll over proceeds from the deal into the new investment.
These terms can all be fine-tuned during deal negotiations. However, having someone help you navigate the process and support you during negotiations might be helpful.
It is much harder to determine and approach the right strategic buyers. Identifying the right strategic buyers entails understanding why they might be interested. Some screening questions to ask yourself might be:
- What is the strategic rationale? Why would they be interested in talking to me? Complementary offering? Moving up or down the value chain? Geographical expansion? Synergy potential?
- Where are they based? Are they active in my geography or trying to enter a new market?
- Have they recently announced an M&A war chest or an acquisition roadmap?
- How acquisitive have they been in the past?
- How will they finance the deal? How much cash is on the balance sheet? Are they publicly listed (if so might do a cash and equity mix)?
Remember that with strategic buyers you should factor in competitive dynamics. Make sure that you have in NDA in place before entering in-depth information exchange and stage the release of sensitive information for the section of the process when their interest is already firmed up.
An Ithaca specialist can help you identify potential counterparties, access them and communicate with them in an effective style, navigating the dynamics around corralling them and managing them throughout a process.