Buyers of growth businesses broadly come in two flavours; (1) large corporate entities that pursue acquisitions for strategic reasons and (2) financial sponsors who aim to generate a return for their limited partners over the 7 – 10 year lifetime of their fund.
Strategic buyers and sponsors will assess your business differently
A corporate acquiror will conduct a ‘merger consequences’ analysis that balances the costs of acquiring the business with the expected benefits.
- Costs of acquisition will be both the consideration paid for the business, either cash or shares (see next article), and the management time required to integrate the new operation with the existing one
- The benefits can be either providing a strategic advantage or to generate synergies. Synergies are broadly where the buying and selling businesses overlap and therefore present an opportunity for cost savings or revenue enhancement
As a financial sponsor is operating on a pre-defined timetable to acquire and then sell the business, they are interested in maximising the financial return between these two points. They have two levers through which to do this:
- The first, and arguably less widely used, is by improving the operations of the business. Refining the growth plan and providing access to their network are two common ways that they look to do this.
- The second lever they use is debt. By borrowing a large amount of money, usually with the cash flow or assets of the business they are acquiring as the collateral, they can reduce the amount of cash that they need to spend to acquire the business.
The aim here is that the cash generated by the business over the time the sponsor owns it can be used to pay off this initial debt. They will consider the appeal of your business using a leveraged buyout analysis, which essentially considers the cash generated by buying, holding and then selling the business over the ownership period.
An area of complexity arises where a sponsor buys a business and then uses it as a platform to acquire a number of smaller businesses. This ‘roll up’ strategy had become increasingly common in the years leading up to the current high interest rate / high inflation environment. In these cases, an acquiring business may blend motivations from across these two groups – a sponsor may look to benefit from synergies but also needs to sell the business by a set date.
Ithaca experts are equipped to help you navigate this landscape and give you the best possible chances for an excellent outcome.