You might not be familiar with the term “strategic buyer,” but you’ve probably seen strategic buyers in the market. When Facebook bought WhatsApp, Facebook was a strategic buyer. When Morgan Stanley bought E*Trade, Morgan Stanley was a strategic buyer. When Amazon bought Whole Foods, Amazon was a strategic buyer.
A strategic buyer is a company that seeks to grow by purchasing another company, as opposed to someone acquiring a company simply to run it. The strategic company might be a public company, a private company owned by an individual, or a private company owned by private equity. They’re one possible answer to the questions: When is the right time to sell my business? Who should I sell to?
These are questions that CEO Adam Coffey spends a lot of time grappling with. Coffey is author of The Exit-Strategy Playbook and leads CoolSys, a commercial refrigeration and HVAC service company. In 2019, he led the company through a private equity sale.
“In many cases, strategic buyers are a great fit for entrepreneurs looking to sell their business,” Coffey explained. “You just need a working knowledge of how strategic buyers operate.”
If this sounds intimidating, worry not. Coffey has broken it down to five things you need to know about strategic buyers if you’re considering selling your business to one.
1. Understand the goals of strategic buyers
When it comes to strategic buyers, there are a few things that actually don’t matter. The acquiring company’s backing and structure is irrelevant. How the acquiring company pays for the purchase also doesn’t matter (it may be some combination of cash, leveraged debt, seller note, or stock). What matters are their goals and what type of buyer they are.
Let’s start with goals. Strategic buyers purchase for a multitude of reasons, including expanding into a new geographical market or customer vertical, building density to create saturation in existing markets, or buying expertise, knowledge or new technology.
“In the end, the strategic buyer makes the purchase in order to gain customers, market share, geography and expertise,” Coffey said, “There is generally a specific strategy that drives them to acquire, which is why they’re called a strategic buyer.” You need to understand where buying your business might fit with their plan to best position yourself to sell to them.
2. Understand the types of strategic buyers
When going after those goals, buyers typically fall into one of two buckets. Coffey said there are some that want to turn the lights off and some that invite you to join the team.
“Strategic buyers who want to turn the lights off are not necessarily interested in your expertise,” he explained. “They want your customers and are buying density.”
Let’s say one company is looking to build density by adding customers in their existing geographic market and customer vertical, so they purchase another local company. They already have a president, finance department, service staff and parts, so they may keep some of the staff, but the rest are dismissed. One company more or less displaces the other.
The opposite of this is joining the team. An acquiring company may choose to keep the lights on when they are interested in purchasing a relationship. In that case, their goal is to retain the owners who created the relationship. The purchasing company wants the original owners to remain as part of the company and help them retain their employees.
3. Work out the buyer’s intentions
When you start working with a strategic buyer, you want to determine their intentions. That way, you can ensure their goals align with the goals you have personally and for your business.
To accomplish this, Coffey suggests a direct approach. Start by asking, “How many companies have you acquired in the last five years?” If they’ve purchased multiple companies, ask how many of those former entrepreneurs are still active within the business.
They might tell you that your company is the first they’re acquiring. In that case, ask what their post-close plans for your company are. Is this a buy and build? Are they planning to turn the lights off on your business, or are they expecting you to join the team?
“These questions will show you are a savvy and knowledgeable seller who is capable of an elevated and more meaningful conversation,” Coffey shared. “Buyers will be less apt to attempt to lowball you and you’ll ensure from the start that buyers have similar goals to yours.”
4. Consider the size of the buyer and seller
Selling to a strategic buyer isn’t just about who’s buying and what’s in it for them. Sometimes a strategic purchase can be very positive for the seller. It can provide a greater sense of security and strength because of the new size and numbers, especially if it’s a smaller company.
Smaller companies may decide it’s safer or easier to be part of a larger company, or that they want to learn from the structure of a larger organization. That’s what Coffey and his brother, Mike, did when they sold their insurance agency to Acrisure, a multibillion-dollar company.
“Because insurance agencies are generally slower-growth annuities, most buyers wouldn’t pay any kind of premium price for our company,” Coffey said. “A strategic buyer was the right solution for us, and in Mike’s case, one that would keep the lights on was perfect.”
5. Find the right timing
When it comes to selling your business, timing matters. If you want to retire or start a new venture, and therefore have no earnout, a strategic buyer that wants to turn the lights off could be a perfect fit for your situation.
“However, you may want to diversify but not necessarily exit,” Coffey said. “In that case, a strategic buyer that keeps the lights on is a great path to contemplate.” Consider if you’re seeking a short-term consulting agreement that you can then leave. Or if you want to work for a period of time and remain partially invested.
How you answer those questions will point you to the right type of buyer for your company.
6. Keep your options open
No matter what your goals for selling your business, you can find a buyer who will help you achieve them. In many cases, a strategic buyer is a great fit, whether you want to stay involved or head into the sunset without a backward glance.
Before you begin the sales process, make sure it’s the right time to sell your business. If a sale is the right move, Coffey said it’s always good to have a few strategic buyers in the mix “for competition and to keep the financial buyers honest.” Since there’s such a wide variety of public and private strategic buyers out there, you have a lot of options to choose from.