A business owner must make many decisions before moving forward with the sale of a business. One of the very first involves the type of buyer the seller would consider for the transaction. Sellers can classify buyers based on one of two categories: strategic or financial.
A strategic buyer is, essentially, a buyer that understands your business. This could be a competitor or larger business that operates in the same market. This type of buyer can offer several advantages over a deal with an interested buyer that is focused only on the financials, like a private equity group.
There are advantages to choosing a strategic buyer over a financial buyer. Two examples include:
- Negotiating power. It is very likely the seller will find more success in a negotiation with another party that is involved in the industry compared to one that is not. In addition to increased knowledge about the true value of the business, a strategic buyer may not need to put in as much additional capital to grow the business as the buyer will likely already have many of the needed to assets to continue the business’ growth.
- Culture considerations. Business culture considerations are important for business owners that are looking for more than just a good purchase price. These owners want to help better ensure a smooth transition for employees. A seller can get a better idea of the type of culture the business will become a part of if the strategic buyer has operated in the same industry for a number of years.
There are risks to this type of transaction. A seller generally has a smaller number of suitable buyers. As a result, it is wise to begin building relationships with businesses that could fill this role years before looking to complete a sale. Sellers can take proactive measures like this to help mitigate the risks that can arise during a business sale. An attorney experienced in business transaction deals can help.