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Article Author:

Will a Strategic Buyer Always Pay More?

Stella Y. Su, MBA, CPA, ABV
Senior Manager, Corporate Finance Consulting
ssu@BlackmanKallick.com, 312-980-2912

Traditional wisdom says that a strategic buyer will be willing to pay more for your company than a financial buyer. This might have been true once, but business owners today can’t afford to ignore the abundance of private equity firms and the large sums of money they need to invest. Here’s a glimpse of the landscape you’ll encounter when you put your business on the market.

Getting through the negotiations

Private equity firms can be tough negotiators—after all, buying businesses is what they do. But don’t count on a strategic buyer being any gentler. Some large companies have corporate development departments to seek acquisitions, and they can be as tough at negotiating as a private equity firm.

Another potential downside to strategic buyers: If a competitor comes in, looks at your books and doesn’t buy, you might be worse off than if a private equity firm had done the same thing.

Private equity firms are in the business of buying companies; thus, they tend to have a better picture of the market and can give you a fair price for your company.

For example, a private equity firm will know whether companies in your industry are currently selling for three to four times EBITDA (earnings before interest, taxes, depreciation and amortization) or five to six times EBITDA. This can obviously work for you or against you.

Is there such a big difference between private equity firms and strategic buyers?

The distinction between private equity firms and strategic buyers is beginning to blur. Private equity firms interested in a particular industry will often create a platform and seek add-on acquisitions—and almost no company is too small to be considered an add-on.

In such a case, a private equity firm essentially becomes a strategic buyer. And because private equity firms have deep pockets and access to financing, they might be able to offer a better price for your business. Once a private equity firm acquires expertise in an industry, it focuses on putting that knowledge to good use when acquiring add-on businesses or other platforms in that industry.

Should you try to sell your business yourself?

There are a number of reasons why you should seek professional advice when selling your company:

• You might not know the true value of your company. It’s difficult for you as a business owner to have an objective view of your company’s true worth. You might miss some aspects that are very appealing to buyers or over-value other areas of the business. (See “How to Value a Closely Held Business.”)
• You might miss opportunities if you try to sell it yourself. A seller’s representative can help market your company to a broader market—and get you the best deal. A good corporate finance consultant knows the private equity market and can also find strategic buyers in your industry. (See Buying or Selling a Business articles.)
• Corporate finance experts know how to market your business. Your corporate finance consultant will create professional marketing materials for your company, find interested buyers, and generate and maintain interest in your company. A seasoned consultant is also familiar with the games people play in the buying process and will help you navigate the waters, acting as your advocate.
• Mistakes can be very expensive. Because business owners aren’t in the business of selling companies, they don’t know the intricacies involved in the process. The experience can be a very expensive lesson if you don’t do it right—and one you will probably never use again.

These are just a few of the considerations involved in selling a privately held company. If you need a trusted, experienced advisor to guide you through the process of selling your business, Blackman Kallick’s Corporate Finance Consulting Group is here to serve you.

Questions about strategic buyers and private equity firms?
Contact Stella Su at 312-980-2912.

This publication is part of Blackman Kallick’s marketing of professional services, and is not written tax advice directed at the specific facts and circumstances of any person and/or entity. Contents of this publication are of a general nature, and you should not act on this information without obtaining professional advice from your business advisor that is appropriately tailored to your individual needs and circumstances. This written advice is not intended or written to be used, and cannot be used by any taxpayer, for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.