December 30, 2024
If you’re a mid-sized business owner in the United States or Canada considering selling your business, understanding the type of buyer you want to engage with is critical. Two main categories of potential buyers dominate the market: private equity firms and strategic buyers. Each comes with its unique set of advantages, and the choice between the two can have long-term implications for your business, its future growth and your personal financial outcome. Ready to find out which buyer is the best fit for your business sale?
Private equity (PE) buyers are investment firms that acquire businesses with the intent of growing them and eventually selling them for a profit, typically within 5 to 7 years. They often look for businesses with solid cash flows, strong management teams and growth potential. Private equity firms may buy a controlling stake in your business or a minority share, depending on their strategy and the business’ needs.
Focus on Financial Growth: Private equity buyers prioritize increasing a company’s value through strategic changes, including improving operations, cutting costs and expanding market reach.
Investment Horizon: Private equity firms generally hold onto a company for a limited time (3–7 years) before selling it, aiming for a significant return on investment.
Management Involvement: Many private equity buyers prefer to keep the current management team in place, relying on them to execute the growth strategy. This is often appealing to business owners who wish to remain involved after the sale.
Access to Capital: Private equity buyers often have access to significant financial resources, allowing for acquisitions, growth initiatives and operational improvements.
Strategic buyers are typically companies in the same industry or a related sector looking to acquire other businesses to expand their market share, diversify their offerings, or eliminate competitors. Unlike private equity firms, strategic buyers are often looking for long-term ownership and operational integration.
Synergy Focus: Strategic buyers are looking for synergies — where the combined entity is more valuable than the sum of its parts. This could mean streamlining operations, combining customer bases, or enhancing product or service offerings.
Long-Term Ownership: Strategic buyers usually acquire businesses with the intention of holding onto them for the long haul, integrating them fully into their existing operations.
Industry Knowledge: Strategic buyers often have deep industry knowledge and may already understand your market, customers and competitive landscape.
Cultural Integration: Because strategic buyers often merge businesses into their own, cultural alignment between the two companies is critical for long-term success.
From motivation to management and financial structure post-sale, there are several integral differences between private equity and strategic buyers:
Private Equity: Primarily financial; looking for businesses with potential for growth and profit over a medium-term horizon. They seek to improve the company’s financial performance and then sell it for a higher valuation, typically within 3-7 years. Private Equity firms may roll the acquired firm up into a strategic portfolio company and/or make strategic acquisitions after the sale to bolster the companies financial performance.
Strategic Buyer: Focused on operational synergies, aiming to enhance their existing business, expand into new markets, or acquire complementary products or services. They generally want to keep the acquired business for the long term.
Private Equity: Often keep the existing management team in place, especially if they believe the team is capable of executing a growth strategy. If you’re a business owner who wants to stay involved post-sale, private equity buyers may offer that opportunity.
Strategic Buyer: More likely to integrate the acquired business into their own operations, potentially replacing management. If you’re looking to step away after the sale, a strategic buyer may be a better fit.
Private Equity: Tend to use a leveraged buyout model, meaning they borrow money to fund the acquisition. This can result in a higher purchase price, but it also means that the PE may add debt as a result of leverage. Note, though, that this leverage is not always on the company itself but on the parent company or PE firm.
Strategic Buyer: Often have access to their own capital and may pay cash for the acquisition. They are generally less reliant on external financing but may still work with a bank to help finance the transaction.
Private Equity: Seek to grow the company quickly, often through operational improvements, additional acquisitions and/or expanding into new markets. They want to see a return on investment within a few years.
Strategic Buyer: More focused on long-term operational synergies and integration into their existing business. Growth may be slower and steadier, driven by improving efficiencies and scaling up.
Private Equity: Typically more hands-off when it comes to day-to-day operations, so cultural fit may not be as important. However, if a private equity firm makes significant operational changes, it could impact company culture.
Strategic Buyer: Cultural fit is critical since the acquired company is usually fully integrated into the buyer’s existing structure. A misalignment in culture could lead to employee dissatisfaction and turnover, especially among key talent.
The choice between a private equity firm and a strategic buyer depends largely on your goals as a business owner. Here are some considerations to help you decide:
If you’re looking to stay on and continue running the company, a private equity buyer might be the better choice. That’s because PE firms often prefer keeping the existing management team in place to execute their growth strategy.
However, if you’re planning to retire or leave the business entirely a strategic buyer may be a better fit, as they are more likely to take full control and integrate the business into their operations.
Strategic buyers are generally committed to holding and growing the business for the long term. If you want to ensure your company continues operating for years to come, this may be the right choice.
Private equity buyers typically have a shorter-term focus. If your goal is maximizing financial return in the medium term rather than ensuring long-term continuity, PE firms may offer more attractive terms.
If you have a capable management team in place that can handle growth initiatives, private equity buyers will likely view this as a major asset.
Strategic buyers, on the other hand, may look to integrate the management into their own organization or bring in new leadership.
Choosing between private equity and strategic buyers is a critical decision for mid-sized business owners in the United States and Canada. In broad strokes: private equity buyers are ideal for those looking to stay involved post-sale and prioritize growth, while strategic buyers offer long-term stability and operational synergies.
Ultimately, the best choice depends on your vision for the company’s future and your personal objectives. By understanding the motivations and approaches of both private equity and strategic buyers, you can make an informed decision that aligns with your business and personal goals, and maximize the value of your sale.
With 30-plus years of experience in the mid-sized mergers and acquisitions market, Woodbridge International is an expert at helping companies find the best-fit buyer according to their goals and preferences. Book an obligation-free appointment with one of our M&A experts today.