The Advantages and Disadvantages of Selling Your Business to a Strategic Buyer –
Selling a business to a strategic buyer, such as another company in the same or a related industry, can offer significant advantages to a seller. Approximately 20% to 30% of business exits are to strategic buyers, but this percentage varies based on the industry and market conditions. Here is a detailed look at the advantages and disadvantages of this exit strategy.
Advantages of Selling to a Strategic Buyer:
- Higher Purchase Price:
Strategic buyers often value similar business higher than other types of buyers because they can integrate the business into their existing operations – realizing synergies like cost savings, new market access, or enhanced product offerings. These synergies help a strategic buyer justify paying a premium for the acquisition.
- Faster Closing Process:
Strategic buyers are often motivated to close quickly, especially if acquiring the business provides them with a competitive advantage. A strategic buyer typically has more experience with acquisitions and access to the needed financial resources, leading to a more streamlined transaction process.
- Economies of Scale:
The acquiring company can achieve economies of scale, reducing redundant operations or consolidating suppliers, manufacturing, or distribution, which increases the overall value of the acquisition.
- Future Growth Potential:
A strategic buyer may be in a better position to grow the business in ways that a private individual or financial buyer cannot, by simply leveraging its existing resources, customer base, or market knowledge to accelerate the growth of the acquired business.
- Greater Resources for Integration:
Strategic buyers almost always have established infrastructures and resources – such as HR, legal, and intellectual property – to accelerate the post-sale integration of the business into its existing operations, which can result in a smoother transition and potentially greater value creation post-sale.
- Better Cultural Fit:
If the strategic buyer is in the same industry, they often understand the culture and operational nuances of the business. This can make the integration less disruptive for employees, customers, and suppliers.
Disadvantages of Selling to a Strategic Buyer:
- Loss of Control Over Legacy:
Once sold, the seller often loses control over how the business is run, including its brand, decisions concerning employees, and the company’s strategic, long-term direction. The buyer may decide to restructure or rebrand the company, which could alter its identity and legacy.
- Risk of Redundancies and Layoffs:
One of the primary reasons strategic buyers pursue acquisitions is to cut costs by eliminating redundant functions. This can lead to layoffs, particularly in overlapping departments such as administration, sales, or production.
- Possible Cultural Clashes:
Even though both companies may operate in the same industry, differences in corporate culture, management style, and decision-making processes can cause integration challenges. These clashes can disrupt operations and affect employee morale.
- Confidentiality Risks:
When negotiating with a strategic buyer, sensitive information about the business is often disclosed. If the deal falls through, the potential buyer, who is often a competitor, may have gained valuable insights into the business’s operations, strategies, and customer base, which could be used against the seller.
- Complex Negotiations:
Strategic buyers may be more demanding during negotiations, requiring detailed due diligence and imposing terms that are less favorable to the seller. This could include non-compete agreements, earnouts, or contingent payments tied to the future performance of the business.
- Disruption to Employees and Operations:
The integration process, even with a strategic buyer, can be disruptive. Employees may be uncertain about their future roles, and the day-to-day operations could be affected during the transition, leading to possible short-term business instability.
- Non-Financial Objectives May Be Overlooked:
If the seller has specific non-financial goals, such as preserving the company’s culture, retaining key employees, or ensuring the continuation of long-term customer relationships, a strategic buyer may not prioritize these objectives. Their focus is often on operational efficiency and achieving financial synergies.
Selling a business to a strategic buyer can be highly lucrative, often leading to a higher sale price and better growth potential for the business. However, there are trade-offs, such as losing control over the company’s future and potential disruptions to employees and operations. Sellers should carefully weigh these factors when deciding whether to pursue a strategic sale, especially if legacy, culture, or employee welfare are significant considerations.
The share of strategic buyers is generally higher in industries with significant consolidation trends, like medical and technology. If you are exploring a sale to a strategic buyer, understanding your industry’s buyers mix is important to targeting the right potential buyers.
About Greater Prairie Business Consulting, Inc.:
Greater Prairie Business Consulting, Inc. is an award-winning, national consulting practice serving entrepreneurs, small to mid-sized privately held and family-owned businesses and middle market companies of any type with revenues between $1 million and $250 million. The firm helps small, mid-sized and middle market companies maximize their performance and exit.
Greater Prairie Business Consulting, Inc. can be reached by calling 1-800-828-7585 or emailing info@gpbusinesssolutions.com.
About the Author:
James J. Talerico, Jr. is an award-winning author, speaker, and a nationally recognized small to mid-sized (SMB) business expert.
With more than thirty- (30) years of diversified business experience, Jim has a solid track record and an A+ BBB rating helping thousands of business owners across the US and in Canada tackle tough business problems to improve the performance of their organizations.
His client success stories have been highlighted in the Wall St. Journal, Dallas Business Journal, Chicago Daily Herald, and on MSNBC’s Your Business. He was named “Texas Business Consulting CEO of the Year,” by CEO Today Magazine, identified as a “Top 10 Management Consulting Entrepreneur to Watch in 2023” by Entrepreneur Magazine, was listed among the “10 Most Visionary Companies to Watch in 2023” by Inc. Magazine, and has also been ranked among the “Top Small Business Consultants” followed on Twitter.
For more than half a decade, Jim was a regular guest on “The Price of Business,” a nationally syndicated radio program on Bloomberg Talk Radio and has also appeared as a subject matter expert on many FOX Radio interviews. He is a regular contributor to several blog sites and has frequently been quoted in publications like the New York Times, Dallas Morning News, Philadelphia Inquirer, The Entrepreneur’s Review, and on INC.com, in addition to numerous, other industry publications, radio broadcasts, business books, and Internet media.
Jim received a Gold “Stevie Award” for “Thought Leader of the Year,” a Gold “Stevie Award” for “Media Hero of the Year During Covid” and a Bronze “Stevie Award” for “Best Entrepreneur” in the Category of “Business and Professional Services” at the American Business Awards ® in New York City. The competition received more than 3,700 nominations and is the premier accolade for business excellence in the US honoring organizations of all sizes and industries. Jim also received an “Outstanding Leadership Award” at the Money 2.0 Conference for his contributions to the financial services industry.
Jim is the author of “8 Steps to Becoming an ETHICS FOCUSED ORGANIZATION,”™ a small business certification program that utilizes a unique eight – (8) step approach for strengthening ethics in any organization. The certification program won the Better Business Bureau’s “Torch Award for Ethics” for the North – Central Texas Region, the International Better Business Bureau’s “ Torch Award for Ethics,” and a Gold “Stevie Award” for “Ethics in Sales” at the International Sales & Customer Service Stevie Awards ®. Participants who complete this certification program are eligible to receive eight – (8) continuing education units from the University of Texas’ Division of Enterprise Development.
Jim received his Certified Business Exit Consultant (CBEC) ® designation from The International Exit Planning Association (IEPA) to help entrepreneurs, small business owners, family businesses, and middle market companies maximize their business exit, and he received his certification in succession planning from the ASPE.
Jim is also a Certified Management Consultant (CMC) ® and an active member of the Institute of Management Consultants.
Check out more business stories here.
