Sale to a Strategic Buyer

By Claudio Martellacci and Nick Rotundo

Grewal Guyatt LLP

In previous posts on the topic of succession planning, we highlighted transition options available to owners looking to sell their business. These links can be found below.

This article will discuss what a strategic buyer is, along with the advantages and disadvantages of selling to this type of buyer.

A strategic buyer typically operates in the same industry as the business that is for sale (the “target”). Strategic buyers can be competitors, customers, or suppliers of the target, and they typically possess specific industry and operational knowledge that makes the purchase of the target particularly attractive. The primary objective of a strategic buyer is to acquire a business whose products or services compliment its own operations and to integrate both entities on a long-term basis.

Advantages of Selling to a Strategic Buyer

• Higher Selling Price. A strategic buyer can realize “synergies”, which make a purchase more accretive. Synergies can translate into higher revenue and/or lower costs, and therefore increase the profit margins and value of the business. Some examples of synergies are:
• Expanded customer base due to removal of a competitor;
• New vendor relationships;
• Cross-selling of products;
• Geographic expansion;
• Vertical or horizontal integration; and
• Economies of scale.

The existence of synergies for the buyer justifies a higher price than other market participants.

• Streamlined Due Diligence: A strategic buyer possesses a deeper understanding of the industry in which the target operates. As a result, the acquisition process requires less due diligence procedures, and less time spent analyzing the target.
• Less Time Involved Post-Transaction: A crucial step in the acquisition integration process is the transfer of knowledge, connections, and responsibilities. This process can take several years and may even be necessary post transaction to ensure a successful acquisition. The learning curve and transition time may be significantly shortened due to the buyer’s previously developed knowledge of systems and operations. This is particularly beneficial to a seller if they are eager to retire or pursue other goals separate from the target business.
• Long Term View: A seller may prefer to sell to a strategic buyer, since the latter would likely be more capable of managing the business and existing employee, customer and supplier relationships over the long-term. Many owners have built a legacy and brand name that they wish to continue, even after their departure. Selling to a skilled operator is one way to ensure that.
• Better Opportunities for Clients: The target may be able to offer a wider range of products or services to its customers, based on access to the wider network of the strategic buyer.

Disadvantages of Selling to a Strategic Buyer

• Confidentiality: It is common for there to be concern about the flow of information to a competitor, customer, or any other industry participant, notwithstanding the signature of non-disclosure and confidentiality agreements. The challenge is to reveal enough information for a strategic buyer to provide an acceptable offer without divulging your business secrets and key relationships.
• Culture and Employee Reductions: Economies of scale achieved through a strategic acquisition can lead to redundancies in processes or functions, and subsequently, to personnel being terminated. This is particularly common for administrative or office staff. The terms of employee transition should be negotiated prior to the execution of any agreement, especially if employees have been with the business for many years. There may be exposure to unexpected severance costs, as well as harm to existing relationships of the seller, and potentially the buyer as well.
• Lost Legacy:  Business owners who spent years building a business will feel a tremendous source of pride in their business and the legacy they developed and may not feel comfortable with a strategic buyer who plans to make sweeping changes.