When it comes to the buyer of a business, buyers fall into one of two basic categories: financial buyers and strategic buyers.
Financial Buyers Financial buyers value a business based on its past earnings but decide to buy a particular business based on its future earning potential. While micro businesses, sometimes also called lifestyle businesses, are often bought by individuals, larger businesses are primarily bought by investment groups and high net worth investors.
Strategic Buyers Strategic buyers, also called synergistic buyers, may value a business based on its past earnings, but decide to buy a business based on its intangible assets. Often strategic buyers are buying things you never anticipated.
In one case, I recall a struggling lumber yard was bought on the cheap. The seller just assumed that it was going to sell its business to a financial buyer. Because its sales were declining they thought that the business could not command a premium price. In reality, the buyer was a strategic buyer who had no intention of operating the lumber yard after the purchase. The strategic buyer was actually purchasing a deep water dock on the property of the lumber yard.
Strategic buyers are often competitors who want your intangible assets, market share, or location. They could even be customers that want to expand their business downstream or vendors looking to expand upstream.
Can you tell the difference between a financial and strategic buyer?
