The Financial vs. The Strategic Buyer

In our Value Builder series we explore the eight key factors potential buyers review when looking to acquire a business – maybe yours

The Financial vs. The Strategic Buyer

“Success usually comes to those who are too busy to be looking for it.”
– Henry David Thoreau, Author, Poet and Philosopher

Financial buyers purchase your company’s future stream of profits, so their evaluation of your business’s worth focuses on your profitability – and the likelihood of those profits flowing in the future. Since buying your company is probably riskier than putting money in government bonds, a financial buyer will demand a higher return on investment and will usually make an offer within the normal range of multiples being paid for businesses like yours.

By contrast, a strategic buyer develops an offer by estimating the value of your company in the hands of the buyer.  Strategic purchasers start by imagining what would happen if your company was grafted onto their platform. Here are three key reasons a company makes a strategic acquisition:

Lipstick on a cow:

Pumping new life into an aging cash-cow product is one of the likely reasons Microsoft bought money-losing Skype for $8.5 billion. They will be looking to embed the popular calling platform into its next version of the Windows operating system, strengthening its case for companies to upgrade to its offering.

Net Market Share estimates nine in ten of the world’s computers – more than a billion machines – run on a Microsoft Windows system. The trouble for Microsoft is, as of the fall of 2014, only one in ten of those users have upgraded to Windows 8; more than half are still using Windows 7, and just fewer than 25 percent are still running XP. A slick Skype integration could make the next version of Windows a compelling upgrade, in turn making Skype worth the price Microsoft paid.

Microsoft’s acquisition of Skype clearly demonstrates the difference between a financial and a strategic acquisition. Since Skype was losing money, it was technically worthless using traditional financial models yet, strategically speaking, worth billions.

Product in the bag:

A company with a large, underutilized sales force could buy your business so its salespeople have another product to pull out of their bag. AOL, for example, acquired the Huffington Post in large part so that its salespeople could sell the Post’s advertising inventory. AOL wasn’t buying the publication’s future profits (it turned its first meager profit only in 2010); it was buying the advertising inventory which AOL could monetize because it had a sales staff needing more premium inventory to sell.

Market gateway:

Another reason companies make strategic acquisitions is to get access to a distribution channel. Often, gateway acquisitions happen when a company wants to enter a new geographic market with big cultural or language barriers and corresponding high costs of acquiring customers.

For example, high-end office furniture maker Herman Miller recently announced plans to acquire Posh Office Systems, a Hong Kong-based furniture maker generating $50 million in annual sales. Here’s an excerpt from Herman Miller CEO Brian Walker’s announcement of the deal: “Through Posh, we gain immediate access to the Chinese market. As the demand for high-quality seating and furniture continues to grow in the region, we anticipate a significant increase in the sales of Herman Miller products through the Posh dealer network.

You can evaluate what hidden value your business can offer potential buyers by taking the complimentary Value Builder questionnaire available from The Osborne Group. The results will give an assessment of the current potential sales value of your company and generate a detailed report that could uncover assets you haven’t considered. The Value Builder questionnaire, developed by internationally recognized small business expert John Warrillow, gives results based on findings from over 17,000 companies.

To find out how your company is performing, click here to take the Value Builder questionnaire: http://www.thevaluebuildersystem.com/osborne-group

In our upcoming blogs, we’ll examine other Value Builder factors and their impact on your company’s worth. Follow us here for the series:

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