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Selling your business: A guide to institutional (or financial) buyers

As the plan for the sale of your business develops, it’s important to grasp some of the key concepts associated with different type of buyers. The ability to assess different buyers provides a focal point around which to develop an effective strategy for selling your business.

Trade (or strategic) buyers aim to grow their business by realising synergies with newly acquired assets (i.e. your company). The advantages they can offer sellers are numerous they tend to value potential purchases on the basis of what they could contribute to their existing operations, and are happy to pay a premium for that.

Institutional buyers are investors who pool their finances together in order to grow through acquisitions. Their goals typically involve growing their portfolio of companies through leveraging assets, investing capital, increasing efficiency or implementing extra financial discipline, in order to make a return on it from a buyer later down the line.

Your company’s value, finances and projections

Whereas trade buyers look for synergies and the return they can achieve by incorporating a companys assets into their existing operations, institutional (or financial) buyers are generally interested in the direct return they will see by acquiring an existing business.

They are not as interested in its future potential for expanding future cashflow opportunities, as they are in its value, finances and projections at the point of sale. While this might seem a colder approach, this model of buyer could have a lot to offer.

A trade buyer will tend to value your company higher than an institutional buyer; they will also often be more personally invested in your companys future due to their direct involvement in the industry. However, they arent the answer to every situation. Selling to an institutional buyer can be hugely advantageous, given the right circumstances.

In their article Strategic Buyers vs Private Equity Buyers in an Investment Process, Vild and Zeisberger begin with a basic problem. Traditionally, trade buyers were seen to be significantly advantageous over institutional buyers due to their ability to share with the sellers a portion of the value generated by the post-acquisition synergies.

However, in recent years, this has reversed: institutional buyers, and particularly private equity investors, have become potent competitors . Given that the synergy argument (ie that trade buyers will pay more than private equity groups) appears valid, they seek to explore and explain this phenomenon in detail.

The article offers a number of important insights into why this phenomenon has occurred.

Although fundraising is the core challenge of any private equity firm, Vild and Zeisberger argue that this imposes financial discipline on the buyer themselves. …it does not ensure that [institutional buyers] can regularly bid higher than strategic investors , but it helps [them] to proceed smartly and win deals in which they are more likely to generate value for the limited partners.

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