Deciding Your Exit: Is a Strategic Buyer or Private Equity Right for You?

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Are you looking for a quick handover or a partnership that elevates your operations? The choice you make in how you exit your company will determine that path.

After all, selling your company isn’t just a transaction—it’s a pivotal decision that shapes your legacy and your company’s future trajectory.

Many business owners consider two popular paths:

1. Merging with a strategic buyer who knows your industry
2. Partnering with a private equity firm that brings capital and strategic overhaul

Each offers unique benefits and challenges.A strategic buyer may streamline the sale and integrate your operations into their larger framework, potentially offering continuity and immediate financial gain. Alternatively, a private equity firm aims for growth, providing resources and expertise to expand and enhance your business before a profitable exit.

Let’s delve into these options to see how they align with your goals, helping you chart a course that not only closes a chapter but also enhances your business’s legacy.

Strategic Buyers

A strategic buyer is typically a company that’s in the same industry as the one being acquired. They’re looking to buy your company in order to expand their product offerings, enter into a new market, or acquire new technology or talent.

You see this all the time with major tech companies buying up smaller innovators, sometimes with great results for the acquired company (e.g. Google buying YouTube, Facebook buying Instagram), and sometimes simply being phased out or integrated with the new parent company (does anyone remember Postini?).

Pros of selling to a strategic buyer include

• Simple sales process: The sale process is typically straightfotward since there’s no need for extensive due diligence or approval from multiple stakeholders.
• Minimal disruption to management: No need to worry about job losses or corporate restructuring, as the existing management team is usually kept in place.
• Higher price potential: You may be able to negotiate a higher price since the buyer understands your company’s value and its assets.

Cons to selling to a strategic buyer

• Risk of undervaluation: The buyer may try to lowball you since they know your business well.
• Deal disagreements: The deal may fall through if the two companies are unable to agree on price or other key terms.
• Post-acquisition integration: There’s always the possibility that the buyer will integrate your company in a way that diminishes its value.

Private Equity Firms

A private equity firm is an investment firm that provides capital for companies with high growth potential, often in exchange for a significant ownership stake. These firms typically invest in companies that are not yet publicly traded.

Contrary to the old stereotype, today’s PE firms are incentivized to focus on driving growth, not just making a quick buck. They bring in expertise to the business, improve operations, and provide access to new markets and resources.

Pros of selling to a private equity firm

• High growth potential: Private equity firms provide capital to help your company grow, which can lead to a higher sale price later.
• Quick decision making: No need for shareholder approval, so the acquisition process is still comparatively simple.
• Professional management: These firms often bring in experienced management teams to drive business growth, giving you peace of mind.

Cons of selling to a private equity firm

• Job cuts: Layoffs are common, so there’s no guarantee your employees will keep their jobs.
• Debt load: Acquisitions are often financed with debt, which can strain your company’s cash flow.
• Loss of control: After the sale, you’ll no longer have a say in how the company is run.

So, which type of buyer is better?

As with any complex decision: it depends. Here, it depends on your specific situation, such as what’s important to you as a CEO:

Generally speaking, if you’re looking for a sale with minimal disruption to the team, you’re more likely to find that with a strategic buyer. However, if you’re interested in seeing your company grow and thrive long-term (even if it risks a lower price point and reduced cash flow), then selling to a private equity firm may be a better option.

If you’re looking for a quick exit, there’s no set rule for which of the two options is faster, as this will depend largely on the individual company and their size etc.

Be sure to involve financial advisors early in the process as you assess your company’s situation and weigh your options.

Even a fast exit needs a good plan

To ensure a smooth business exit, it’s crucial to assemble the right team well in advance. Start planning years ahead and align your financial and operational strategies with market expectations.

Assemble key advisors, like an M&A attorney, CPA, investment banker, and value enhancement consultant, can help navigate legal complexities, boost your valuation, and ensure a smooth transition. Engaging these experts early maximizes your business’s value and prepares you for a successful sale.

A full exit isn’t everyone’s best option

For many owners, taking some chips off the table is a smart way to reduce risk and diversify investments, especially when nearing retirement or new ventures. With most of their net worth tied up in the business, a lot of owners turn to options like bank debt or recapitalization to provide liquidity.

Balancing risk tolerance, debt comfort, and competitive spending is key to achieving financial security and peace of mind while still maintaining some control over the business.

To get a better understanding of your options and make sure you get the right people involved, get in touch with us at Merit. We’ll help you assess your situation, see the full scope of your options, and decide on the right decision for your business. Book a discovery call to learn more.