The moment has arrived: you are going to transfer your company to an external buyer. Are there several parties interested? In the end, you will have to choose one party.
The sales price need not be at the top of the priority list, of course, but it will certainly factor into your decision. Where price is concerned, the "strategic premium" is an important concept. This is the additional premium a buyer is willing to pay for your business on top of the stand-alone value of the business. So how do you know in advance which type of party is willing to pay the highest price?
Types of buyers
First of all, it is good to consider what type of (external) buyers there are:
- Strategic buyers: these are parties with a predominantly strategic rationale for the acquisition.
- Financial buyers: these parties invest in companies either with third-party money or with their own money, with the primary objective of achieving returns.
Within M&A, there is generally a view that strategic parties in an acquisition are willing to pay more than financial parties. Is this view always justified? Below we discuss four factors that impact the level of a strategic premium.
1. Strategic fit
The better your company meets a buyer's needs, the greater the additional value this will bring to a buyer (the synergy benefits). And the higher the strategic premium will potentially be. This aspect does not only relate to strategic parties. If an acquisition functions as an "add-on" to one of an investment company's existing holdings, then this party is in fact acting as a strategic party and there may be synergy benefits that can be reflected in the premium.
2. Exit pressure
When there is pressure for a buyer to resell the company within a certain period of time, this party is expected to make a certain return in the limited time. The higher the price paid in advance for the business, the harder it becomes to realize this return. Ergo: a motivation not to overpay. Exit pressure applies mainly to financial parties.
3. Access to capital
Whereas large strategic buyers often have a considerable amount of their own resources at their disposal, financial parties are limited to the funds raised. In practice, in addition to these funds, the latter category often uses bank capital to finance the transaction. It is of course important here that there is sufficient cover from the business to be acquired. This also provides an incentive not to pay too high a purchase price.
4. Opportunities for value creation
If significant improvements in current returns are possible, economies of scale are achievable, or if there are opportunities for a combination of the two, then the company is an attractive proposition for investment companies. The greater and more feasible the opportunities for value creation, the more a party may be willing to pay.
Of course, there are several other factors that affect the level of the strategic premium - however, the four facets described above already give a pretty good picture. As for choosing a particular type of buyer, it is important to keep in mind that parties cannot always be classified as purely strategic or purely financial.
Willingness to pay by type of buyer is therefore not nearly as black and white. What is the most suitable buyer for your company will vary from situation to situation. Sound advice is therefore indispensable.
