As a quick refresher, potential buyers / investors fall into two primary categories:

1. Strategic Buyers - These are operating companies that provide staffing and recruiting services and are often competitors of your firm. They can also be unrelated to your company but looking to grow in your market to diversify their revenue sources. Their goal is to identify companies whose products or services can synergistically integrate with their existing P/L to create incremental long-term shareholder value.
2. Financial Buyers - These include private equity firms (also known as "financial sponsors"), venture capital firms, hedge funds, family investment offices and ultra-high net worth individuals (UHNWs). These firms and executives are in the business of making investments in companies and realizing a return on their investments. Their goal is to identify private companies with attractive future growth opportunities and durable competitive advantages, invest capital, and realize a return on their investment with a sale or an IPO.

Because these buyers have fundamentally different goals, the way they will approach your business in an M&A sales process can differ in many material ways. Below are five of the biggest differences we've witnessed:

Evaluation of Your Business

Strategic buyers evaluate acquisitions largely in the context of how the business will "tie in" with their existing company and business units. For example, as part of their analysis, they will ask questions like, "Are the products sold to their customers? Does your company serve a new customer segment for them? Are there manufacturing economies of scale we can realize? Is there intellectual property or trade secrets that you've developed that they want to own or prevent a competitor from owning?" Conversely, financial buyers won't be integrating your business into a larger company, so they generally evaluate an opportunity as a stand-alone entity. In addition, they often intend to buy businesses partially with debt. As such, they scrutinize the business' capacity to generate cash flow to service a debt load and determine how to quickly increase the long-term value of the company to ensure an acceptable return on their investment.

At the end of the day, both buyer groups will carefully evaluate your business; however, strategic buyers focus heavily on synergies and integration capabilities whereas financial buyers look at standalone cash-generating capability and the capacity for earnings growth.

Determining the Investment Merits of our Industry

While this might seem obvious, strategic buyers usually are more "up to speed" on your industry, its competitive landscape and current trends. As such, they will spend less time deciding on the attractiveness of the overall industry and more time on how your business fits in with their corporate strategy. Conversely, financial buyers are typically going to spend a lot time building a comprehensive macro view of the industry and a micro view of your company within the industry. It is not uncommon for financial buyers to hire outside consulting firms to assist in this analysis. With this analysis, financial buyers might ultimately determine they do not want invest in any company in a given industry. Presumably, this risk is not present with a strategic buyer if they are already operating in the industry.

As the seller, the risk of having a sale process fail due to "industry attractiveness" factors is reduced by ensuring that you are talking to strategic buyers.

Strength of Back-Office Infrastructure

Strategic buyers are going to focus less on the strength of the target company's existing "back-office" infrastructure (IT, HR, Payables, Legal, etc) as these functions will often be eliminated during the post-transaction integration phase. Since financial buyers will need this back-end infrastructure to endure, they will scrutinize it during the due diligence process and often seek to strengthen the infrastructure post-acquisition.

As such, you'll likely want to de-emphasize the importance and/or value of your back-office infrastructure in discussions with a strategic buyer (who usually won't care), whereas it's important to be prepared for thorough evaluation of these functions when having discussions with a financial buyer.

The Impact of the Investment Horizon

Strategic buyers intend to own an acquired business indefinitely. Financial buyers typically have an investment time horizon of four to seven years. When they acquire and subsequently exit the business and how that pertains to the overall business cycle will have an important impact on the return on their invested capital (for example, if you buy a business at the peak of a business cycle for 6X EBITDA and can only sell it for 4X EBITDA 5 years later, it's tough to make that scenario into an attractive return)

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As such, financial buyers are going to be more sensitive to business cycle risk than strategic buyers and they will be thinking about various exit strategies for your company before making the final decision to invest in / buy your company.

Transaction Efficiency

Financial buyers are in the business of making acquisitions. It is typically one of their core competencies to execute deals in a timely fashion.

Strategic buyers may not have a dedicated M&A team, may be encumbered by slow-moving boards of directors, bureaucratic committees, territorial division managers, etc. Their main advantage is that since they know the staffing arena they don't have to ramp-up to learn the business.

In any event, be prepared for a 6-12 month process from the time you decide to sell until closing your deal.

There is always more that can be said about the many important differences between strategic and financial buyers, but these are the basics. Contact us if you would like more information or if you have any questions about these types of buyers.

For more information on Staffing M & A or for a complimentary confidential discussion, contact:

Bob Cohen at 416-229-6462 or Sam Sacco at 910-509-0691.