Mergers & Acquisitions: The Usual Suspects
Part 1: The strategic, financial, and “hybrid” buyer.
When you decide to sell your business to an outside entity, there are typically three types of buyers you’ll run into: Strategic, financial, and what we refer to as “hybrid” buyers.
Having several buyers interested in your company is good. Having several buyers AND a mix of different buyer types (listed below) is great. The reason? Simple: Each will value your business differently, and you can’t always guess who will give you the best deal, or who will be the most likely to make it to the finish line.
For example, a strategic buyer might pay a premium for a location, or for your executives, or for your culture. Financial buyers may believe that your business will benefit from the rebound in housing and that they then can sell your business or take it public at a bigger price. Hybrids may have a grand strategy, where the sum of the parts is valued far greater than the parts operating alone—a circumstance which can lead to a higher transaction value (for them) down the road. Because these dynamics are a constantly changing landscape, it helps to have a little bit of everyone, if possible.
In Part I, we’ll review strategic buyers. In Part II, we’ll review financial and hybrid buyers. Both articles will contain the top three pros and cons of pursuing a deal with each type.
The Strategic Buyer
A strategic buyer (also referred to as an “industry” buyer) is typically another company, usually in your line of business or at least in a similar business (i.e. a manufacturer who wants to come down the channel and buy distributors, an LBM dealer acquiring a customer/ framer, or a lumberyard having interest in a roofing and siding operation), seeking to grow by acquisition. Most of the time, the strategic buyer is larger in size than the acquisition target because size comes into play when it is time to cut the check for the acquisition. With regard
to your size, strategic buyers might not have a size threshold if your business makes sense for them.
Pros of doing a deal with strategic buyers:
1. Strategic buyers buy businesses for all kinds of reasons. Examples might include wanting to be in your market, access to your customer base/product lines, or just using their balance sheet to re-invest outside of their existing business. Regardless of why they want to do a deal with you, the point here is if they have interest—there’s a strategic need or reason to do a deal with you.
2. You won’t have to explain the idiosyncrasies of your business. That’s a real plus, because you’ll avoid the time-consuming process of explaining to an outsider the rather quirky nature of some common LBM practices, like how we manage seasonal swings in revenue, collections and receivables, or inventory dating.
3. Can rationalize paying you the most amount of money for your business by taking into account consolidation opportunities, purchasing efficiencies, etc. They’re also (theoretically) going to be in the industry for the long haul, so can take a longer-term perspective on where we are in the housing cycle.