Choosing a Buyer
Finding the right buyer or investor for your business may seem like a daunting task as different buyers can have very different implications for your business downstream. However, knowing more about the different types of buyers and what they are looking for will help you make the right decision.
Financial vs. Strategic
There are two primary types of buyers, financial and strategic. A strategic buyer seeks to improve its business strategy through the acquisition, using the transaction to strengthen an existing market for them or sometimes open new markets. A financial buyer, on the other hand, functions as a long-term investor (with a usual investment time frame of 4-6 years) that is interested in the return it can generate through an acquisition and subsequent sale. Financial buyers often provide capital in order to stimulate growth, develop products or services, or advance market positioning. Because they are engaging in deals on a regular basis, financial buyers have a high degree of financial literacy and understanding of the sales process and are usually considered a very sophisticated buyer. Thus, it is crucial to have a knowledgeable intermediary to navigate the dynamic with potential financial buyers to ensure an optimal valuation and a timely, successful outcome. Likewise, an intermediary’s skill in navigating the differences between strategic and financial buyers is highly valuable as it is not uncommon to have both types of buyers engaged on the same process.
The financial buyer world gets a bit more complicated as there are a few categories of financial buyers: Private Equity, Venture Capital, and Family Offices.
Private Equity and Venture Capital in M&A
Both private equity (PE) and venture capital (VC) firms acquire stakes in private companies (or companies that become private) using funds raised through limited partners (LPs) with the intention of selling those positions for a return. Limited Partners can consist of pension funds, insurance firms, family offices, endowments, foundations, sovereign wealth funds, ultra-high worth individuals, and funds of funds.
Both types of firms charge limited partners with a management fee of ~1.5-2.0% of assets under management (AUM) and a “carried interest” (~20%) on the returns of the investment as long as the limited partners receive a profit above the “hurdle rate” (minimum rate of return, typically 8-10%).
Key Differences Between Private Equity and Venture Capital M&A
|Acquire mature, generally cash flow positive companies.
|Invest in growth-stage companies that often have a tremendous need for cash.
|Utilize a variety of acquisition strategies including leveraged buyouts (LBOs),
add-ons, private investment in public equity (PIPE), and growth equity.
|Utilize only equity to make investments.
|Frequently acquire a majority stake (more than 50% ownership).
|Acquire a minority stake (less than 50% ownership) in any one investment round.
|Investment Holding Period
|Aim to sell positions within 3-5 years of acquisition.
Family Offices in M&A
In recent years, family offices have assumed a greater role in direct investment and M&A. A family office is an adviser or fund that invests on behalf of high net worth individuals. Typically, the investment focus is in the area that the family generated their wealth. However, for larger family offices, investments are diversified while still prioritizing the financial planning of family members.
A substantial advantage to most family office buyout acquisitions is that they offer a flexible holding period that is not restricted by an obligation to return capital to the investors in their funds. As a result, family offices do not have pressure to exit prematurely when further growth is likely. Likewise, many family office investors promote themselves as being more entrepreneur-friendly as they understand (and often have experienced) the challenges of running a small or medium sized privately held business. These dynamics have presented family offices as patient investors that are more concerned with long-term capital appreciation.
Which Buyer Is Right for You?
The current M&A landscape is shifting rapidly with private equity and venture capital firms becoming increasingly similar and family offices allocating more resources to direct investment in businesses. If you are exploring the transition or sale of your business, contact one of our industry experts to learn more about the M&A process and valuations in your industry.
Insights for Middle Market Leaders
Receive email updates with our proprietary data, reports, and insights as they’re published for the industries that matter to you most.