AP's Blog

Who is a Strategic Buyer?

If you are preparing to sell your business, and have done even a small amount of research, then you no doubt have heard of a mythical creature called the “Strategic Buyer”. This wonderful creature rewards your hard work by buying your business for fantastic multiples of revenues. If you have met a broker, s/he no doubt has mentioned this creature as well. S/he knows where to find this creature, and luckily for you has a list of them in their network. You sign up, and the buyer appears, handing you 8-10x of revenues. You buy a big yacht, and are soon sailing around the Greek isles.

Hmmm… so what’s wrong with this picture. Well, for one thing, if this were true, why would we all not start a small business, reach 300K in revenues, and sell out for a couple of million. Because it doesn’t work that way. “But I keep hearing about all these companies that were sold to strategic buyers” you protest. That’s because most use the term strategic buyer loosely. If you think about it, every purchase is a strategic purchase. Obviously the buyer has some strategy in mind when s/he buys your company, even if it is a purely financial strategy. To get the true idea of strategic purchase, lets delve into an example.

Lets say, you Mr. Seller have been running your firm diligently for the last 25 years. Over these 25 years, you have developed a solid channel of 150 repeat customers, lets say gift shops in Airports and Museums. You have a limited product line of 2-3 products. You are approached by a buyer. This buyer has 30-40 complementary products that could be sold to your customers. However, they have absolutely no presence in your channel. From the buyer’s perspective, it is not unreasonable to assume that they could increase your existing revenues by a factor of 10-15 over the next 2-4 years. Their decision to buy your company is not rooted in your existing revenues or earnings, but in a specific asset you possess that is very valuable to them. This is the key attribute that differentiates a strategic buyer from other types of buyers. They have a clear vision of which assets they will be extracting value from. It could be your channel, it could be your technology, or your patent portfolio.

The point is, no one can have a ready network of strategic buyers. There is no such thing. Every buyer and seller combination may have a unique fit somewhere that could make the sale a strategic acquisition for the buyer. Only with an intimate knowledge of the other party’s business, can a seller identify a strategic buyer, and a buyer identify a strategic acquisition. It is very unlikely for an intermediary like a business broker who knows next to nothing about your business, to have a TRUE strategic buyer for your business waiting in the wings.