3 Types of M&A Buyers and How to Appeal to Them

3 Types of M&A Buyers and How to Appeal to Them

Selling your company can be one of the most personally and professionally rewarding decisions you will ever make. It’s also one that requires extensive planning and foresight.

The mergers and acquisitions process isn’t just about reaching the right deal—it’s about closing that deal with the right type of buyer. 

Selling to the wrong buyer can completely derail your strategy and negatively impact the next stage of your business journey. To maximize the value of the transaction, it’s important to find a buyer that aligns with your objectives and strategic vision.

When it comes to M&A, there are generally three different types of buyers: strategic, financial, and individual. Understanding what motivates each buyer is key to executing a successful transfer of ownership for your business.

Here’s an overview of the three main types of M&A buyers in lower middle market transactions—and a few tips on how to best position your company for sale to each of them.

1. The Strategic Buyer

Strategic buyers are often public or private companies looking to acquire other companies within the same industry (or an adjacent one) and grow their corporate footprints. They aim to strengthen their current position in the market or vertically integrate operations to create economies of scale.  

These buyers often seek to acquire companies that help them achieve the following objectives:
  • Staying competitive and increasing market share
  • Diversifying their product base
  • Accessing new markets and/or technologies
  • Acquiring intellectual property 
  • Gaining access to new customers 
  • Adding more talent to their workforce

Strategic buyers are willing to pay the highest multiples. They’re highly perceptive to the companies that can help them capture synergies and create long-term value.

Plus, they bring a wealth of industry knowledge to the table, which they can use to significantly bolster a company’s value.

However, strategic buyers also come with new strategies and objectives that may alter the direction of your business. If you’re looking to maintain your independence or you have a unique vision you want to see fulfilled, strategic buyers may not be the ideal candidates.

How to Appeal to Strategic Buyers

Strategic buyers look for investments that are projected to provide long-term value and positive returns. They’re most interested in a company’s reputation, size, market share, developed technology, trademarks or patents, and quality of products or services. 

To appeal to this buyer, you must present a detailed analysis of your company’s current strengths and weaknesses, as well as projections for the future. You should also make sure you’ve demonstrated all possible synergies (cost savings) before putting your company up for sale. 

2. The Financial Buyer

Many sellers confuse financial buyers with strategic buyers, but the two are very different. 

Financial buyers are typically private equity firms or family offices. Unlike strategic buyers, they are simply looking for a profitable return on their investment. Therefore, a solid, well-maintained company that has a plan for growth is most appealing. 

These buyers are typically looking to use capital to grow the businesses over the course of three to seven years. It’s common for financial buyers to purchase add-on companies to increase economies of scale and use multiple arbitrage to maximize their returns when exiting. 

Financial buyers are typically the most flexible regarding the purchase price, financing, and deal structure. As long as they can clearly see a path to quick growth, great returns, and a planned exit, they can provide a smooth transition and help professionalize your business post-sale.

Unlike strategic buyers, who often want full control of the company—not just a minority share—financial buyers frequently have other motivations that go beyond an outright purchase. This might be in the form of a management buyout, recapitalization, or growth capital, just to name a few.   

How to Appeal to Financial Buyers

Financial buyers often prioritize increasing EBITDA and market share over a shorter investment period (usually three to seven years). As a result, they are looking for profitable, stable companies with solid growth potential.

That said, it would be best to have projections for solid growth in the short term and a plan for the future—financial buyers want to know how to grow the company and what they’ll need to bring to the table to achieve that growth and profitability. You may also want to display historical financial performance that’s consistent and show where there are opportunities for improvement.

3. The Individual Buyer

This is the least common type of M&A buyer. Individual buyers are typically high net-worth individuals who have had significant success working for someone else. They’ll generally only purchase one business in their lifetime and treat the purchase as an opportunity to have more independence, build wealth or create a legacy. 

If you’re looking to preserve your company’s unique vision, individual buyers are an ideal option. However, they may not have connections or resources to aid in growth opportunities once the buyout is complete.

As a litmus test for individual buyers, we always probe to reveal a buyer’s true  motivation for pursuing a particular industry. For example, are there any synergies in the potential purchase with their previous work history? If their motivations and synergies are weak or nonexistent, there’s likely no deal to be created. 

How To Appeal to Individual Buyers

Individual buyers are looking for specific opportunities that align with their interests. They are usually seeking deals based on their passion for your product, service, or industry. It’s important to emphasize all the positive and negative aspects of your company within the context of their interest and experience.

Final Thoughts

Every buyer has vastly different motivations and capabilities.

You should consider all the appropriate criteria to ensure your business appeals to the right buyers. Doing so will maximize your company’s value and ensure a smooth transition.  If you are navigating the M&A process, REAG is here to help. Our team works closely with clients to achieve their objectives and maximize the value of their businesses.  To learn how we can help you achieve your goals, schedule a discovery call today!
3 Types of M&A Buyers and How to Appeal to Them