Selling a company - Strategic vs. financial investors - KERN
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Selling a company - strategic vs. financial investors

The decision for a buyer in a company sale is probably one of the most important. Strategic investors and financial investors often appear even in the case of medium-sized companies that are facing a generational change. This article looks at the three main differences between investors in the sale of a company.

For many entrepreneurs, selling a business is a one-off act. For this reason, the process is naturally accompanied by advisors. Very often the terms "strategic investor" and "financial investor" are used. These terms are by no means easy to distinguish. Thus, they are partly confusing for the entrepreneur who wants to hand over his company.

Strategic investors

Strategic investors as company buyers have an interest in the acquisition that goes beyond the financial. This is because a strategic investor runs a company himself. With the purchase of the company, he intends to improve (whatever that may look like) his market position. Synergy effects are to be exploited, further resources are to be acquired to take on larger orders or a new, strategic pillar of the company is to be created. These are just a few possibilities for a strategic investor.

Financial investors

In Germany, financial investors have only been active since the end of the 1980s and beginning of the 1990s. During this time, companies were founded for the first time whose sole purpose was to acquire companies and sell them at a profit. These types of company buyers therefore do not develop any direct operational activities at the purchased object. Rather, they merely hold and manage their investments with the purpose of generating a high return on the sale. The terms "public equity" and "private equity" also belong in this context.

Private equity and public equity

Private equity is the raising of equity capital outside the stock exchange. In contrast, the term public equity includes the raising of equity capital on the stock exchanges.

3 Reasons for this distinction

  • The holding period of the purchased property is different: The holding period with strategic investors will naturally be much longer than with financial investors. A strategist therefore always has an interest in a long-term acquisition. After all, new markets and corporate strategies need time and patience. Financial investors, on the other hand, often have a holding period already firmly anchored in their corporate strategies.
  • Purchase price negotiations have a different background: All buyers naturally want to pay the lowest possible purchase price. A financial investor will therefore primarily focus on the figures when negotiating the purchase price. He must optimise his return. A strategic investor naturally also looks at the figures, but has a different focus. He wants to plan for the long term with the company. For him, the business model and the resources are more important than the return on a sale.
  • The effort of due diligence: In due diligence, a strategic investor will often do the due diligence himself. He has his own companies and knows what to look for. The strategist usually knows the market. As a result, he can assess the company situation quite well himself. A financial investor, on the other hand, will probably rely more on external consultants for due diligence. The effort is correspondingly higher.

These were the two different types of investors in the sale of a company. In addition, there are other points to consider when selling a company. You can find out what these are from KERN founder Nils Koerber in the free Webinar Company sale without risk and loss of value.

Tips for further reading:

KERN study on business succession in Germany 2020: Acute lack of successors threatens family businesses

Comment: Unresolved company successions endanger our prosperity

Advice traps in the process of business succession

The costs of a business succession or an M&A project

Company succession: Why a pure success fee makes serious advice difficult

Companies in the IT sector

The 5 most important contents of an entrepreneurial emergency kit

Strong increase in business successions in Swabia

What distinguishes financial investors and strategists in the sale of companies?

Strategic investors have an interest in the purchase beyond the financial. After all, they run a company themselves. With the company purchase they hope to gain a strategic advantage in the market. This could be, for example, the use of synergy effects or the expansion of resources for larger orders.
Financial investors on the other hand, pursue a purely financial interest. To this end, they buy companies and sell them on at a profit. Therefore, they do not become directly operational. Instead, they hold and manage their investment to increase the value of the company. Because that way, their profit increases when they sell the company.

Why is the distinction between strategists and financial investors so important?

1. different holding periodsStrategists naturally hold their investment much longer than financial investors. After all, new markets and corporate strategies also need more time. Financial investors, on the other hand, often have a holding period written into their corporate strategy.
2. changed focus in the purchase price negotiationAll investors naturally want to pay the lowest possible purchase price. A financial investor focuses primarily on the figures. After all, he has to optimise the return. Of course, the figures are also important for the strategic investor. But his focus is on the business model and the resources. After all, he wants to plan for the long term with the company.
3. the effort of the due diligenceA strategic investor often carries out the due diligence himself. After all, he has gained his own experience in the market with his own companies. In contrast, a financial investor usually commissions an external consultant with the due diligence. This increases the effort.