What Is a Financial Buyer?
A financial buyer is a type of buyer in an acquisition that is primarily interested in the return that can be achieved from the purchase. The buyer is interested in what cash flow the investment will generate and what kind of exit strategies the investment will offer in the future, whether it be in the form of an initial public offering (IPO) in which the business is taken public or an outright sale.
A financial buyer is different from a strategic buyer, which evaluates an acquisition primarily on how it fits with the acquiring company's strategic goals. A strategic buyer, for example, might acquire a company because that company has a superior distribution network or has products or geographic territories that are complementary. The target company's financial condition would thus be a secondary consideration.
Financial buyers are often private equity firms that represent an alternative to company owners who want to remain involved in their businesses but need an influx of cash.
Understanding a Financial Buyer
A financial buyer is typically a long-term investor looking for a solid, well-managed company. They may not make any immediate changes, or they may implement changes designed to make a company profitable and thus more attractive to future investors.
Financial buyers may focus on how much cash flow a business generates, and they will also take into consideration possible exit strategies. They may seek to improve cash flows by growing revenues or by cutting costs. They may also merge with similar companies, thereby creating economies of scale. Exit strategies may include an IPO or selling the company outright to a strategic buyer.
Key Takeaway
- Financial buyers are long-term investors interested in the return that they can get by buying a well-managed company.
- Financial buyers look to generate cash flow by boosting revenue, cutting costs, or creating economies of scale by buying similar companies.
- Financial buyers are also focused on what exit strategies the investment or company might offer, such as an initial public offering (IPO) or even a sale.
- Financial buyers are different from strategic buyers, who are more interested in how a potential acquisition fits into their own long-term goals.
- Strategic buyers are often bigger companies that are well capitalized, able to spend more, and less focused on whether a company can generate quick cash flow.
Special Considerations
Financial buyers often use a significant amount of leverage in their acquisitions. And in effect, their lenders are acting as their partners in the transaction. Financial buyers are also more likely to keep on existing management when buying a company, rather than bringing in a new team to shake things up.
Unlike for strategic buyers, price is a very important consideration as it ultimately affects the return a financial buyer may achieve. Strategic buyers, on the other hand, may be willing to pay more for a company because they may see synergies that can be achieved in the long term. They also tend to be bigger companies with better resources and access to more funding than financial buyers.
FAQs
Financial buyers are long-term investors interested in the return that they can get by buying a well-managed company. Financial buyers look to generate cash flow by boosting revenue, cutting costs, or creating economies of scale by buying similar companies.
Who would pay more, a strategic or a financial buyer? ›
Often, strategic buyers are willing to pay more for companies than financial buyers. One reason is that a strategic buyer is better placed to realize synergistic benefits almost instantly. This is because of the economies of scale that may arise from integrated operations.
What is a buyer finance? ›
Buyer Financing means one or more loans or extensions of credit made in order to finance in part the payment of the Purchase Price, including any under any Buyer Loan Commitment. “
What are the benefits of selling to a financial buyer? ›
The advantage of selling to a financial buyer is that you can maintain operational control of the business you started and some ongoing financial interest.
What is an example of a buyer in a financial market? ›
a family buying a house from their neighbor. families buying new houses. corporation leasing a factory. corporations building new factories.
What are sponsors or financial buyers? ›
Financial buyers include private equity firms, venture capital firms, hedge funds, family offices, and high-net-worth individuals. These firms and executives invest in companies and aim to realize a return on investment within 5-7 years through a sale or IPO. One major difference is how they evaluate your business.
What makes a good strategic buyer? ›
Breaking down Strategic Buyer
The “strategy” employed by the buyer is that he finds a company with potential for expansion. As such, strategic buyers are always looking for opportunities to venture into new product lines within the same industry, find new geographical markets, and secure more channels of distribution.
What is a strategic buyer job description? ›
A strategic buyer is a company or investor that seeks to acquire companies or assets, whose acquisition will add synergistic value to their existing portfolio. Strategic buyers are often in the same industry as the target companies, but not always.
What is the difference between a strategic buyer and a buyer? ›
“Strategic” buyers often look to acquire your business in order to expand their platforms or eliminate competition (subject to antitrust). Financial buyers, like PE funds and family offices, look to acquire your business to grow and sell after a period of time.
How do buyers work? ›
Buyers are responsible for purchasing goods for a company to use or sell in their own business. This position requires extensive research and the ability to negotiate contracts with suppliers, manage an inventory, evaluate quality goods, and stick within a budget.
1. a person who buys; purchaser; customer. 2. a person employed to buy merchandise, materials, etc, as for a shop or factory.
How does buying on finance work? ›
When you are buying goods on finance you are essentially borrowing money to pay for the goods you want to buy. For example, you may need a new sofa. You do not have the money that you need to pay for the sofa. However, you are sometimes able to get a loan today to buy that sofa.
What are the disadvantages of financial buyers? ›
Perhaps one main drawback of working with financial buyers is that they're going to be heavily focused on your financial statements. They'll want to see that you have a strong history of being a healthy company.
What is an example of a financial buyer? ›
So the main task of a financial buyer is to identify companies with excellent growth potential with some need for operational improvements and, thereby, make good on their investment in a reasonable timeframe. Private equity firms (PE) are classic examples of professional financial buyers.
Do financial buyers provide capital? ›
Unlike strategic investors, they do not integrate acquired businesses into their existing operations. Instead, they often act as financial sponsors, providing capital and strategic guidance to help the target grow and achieve its objectives.
Are financial buyers operating partners? ›
Financial buyers are operating partners that try to create synergies. Financial buyers are institutions that provide capital and are not operators. Strategic buyers are asset managers that are trying to time the purchase or sale of a business.
What is the difference between an investor and a buyer? ›
Perhaps the biggest difference between an investor and the typical homebuyer is their intentions for the property upon buying it. In the case of the typical homebuyer, they're looking for a permanent residence for themselves and their family. Investors, on the other hand, see your home as a business opportunity.
Are private equity firms financial buyers? ›
Private equity firms are considered "financial buyers" because they don't bring synergies to an acquisition, as opposed to "strategic buyers", who are generally competitors of a target company that benefit from synergies when they acquire or merge with the target.
