During a period of economic uncertainty, many entrepreneurs love to hear reports of businesses being sold to strategic buyers for apparently large sums. The truth is the investors that are strategically-inclined will recognize higher valuations with potential investments than those that are financially-oriented venture capitalists. Additionally, strategic investors can provide validation for financial investors, and influence them to recognize a higher valuation.
Strategic vs. Financial Buyers
It’s better to sell your business to a strategic buyer because they believe that your business will help theirs perform better. Financial buyers are only interested in the economic value that your business will create on its own. Because a strategic buyer will likely have a larger business than yours, the leverage that yours can create may be much greater.
Generally, strategic buyers will pay more and sometimes will buy when no one else will. If you can interest more than one strategic buyer, you may find yourself in the best possible situation: a bidding war.
Explore Your Options
Even if you’re not currently interested in selling your business, understanding how it might create strategic value for larger companies can be a productive exercise. That analysis may allow you to create new strategic relationships and increase sales.
Your ability to identify these and more subtle alliances to the potential buyer can be worth millions in exit value – the value at the time that the company is sold. Every executive team can create value and realize benefit by examining the potential strategic synergies that their business can create and initiating discussions with potential strategic partners, acquirers or investors.