Valuation Drivers for Strategic vs. Financial Buyers

Valuation Drivers for Strategic vs. Financial Buyers

Financial Buyers:

A financial buyer normally does not have existing ownership in the same industry or an adjacent or complementary industry. When purchasing a business, they are primarily driven by their return on investment. Financial buyers will make an offer on a business that fits that return. They will back into a multiple of EBITDA or Adjusted EBITDA based on accomplishing that return. The higher the requirement for an individual buyer’s return on investment, the lower the purchase price required to accomplish that return. Simply put, a financial buyer’s primary driver for return on investment will typically cap their willingness to pay higher multiples. 

Strategic Buyers:

A strategic buyer’s primary goal is to buy a business based on synergies that can be achieved long term with their existing business. They may want to enter a specific geographic region where they currently lack a presence. They may want to add products or services that are complimentary to their own. Strategic Buyers may also be able to realize a higher EBITDA than a financial buyer by eliminating redundant expenses and overhead. Any of these reasons may lead a strategic buyer to offer a higher valuation for a business.

It is the responsibility of the mergers & acquisition professional to determine a company’s value drivers for potential strategic buyers and market the business for sale accordingly. At Meridian, our initial and primary focus is to market your business to strategic buyers. We will market a business for sale to the general market only after potential strategic buyers have been fully exhausted.

If you have any questions regarding the process of selling your mid-sized company, please do not hesitate to contact us for a confidential discussion. Whether you are looking to sell your business today, or five years from now, we are happy to discuss your situation and help you develop a strategy for your eventual exit.