When planning a business acquisition, it’s important to be clear on your objectives as the buyer. Do you intend to develop synergies and your capabilities? Or do you only care about ROI and cash flow? There are two routes that one might take—strategic and financial acquisitions. Each of the two brings its own tactics, structures, and results.
This blog explores the differences between the two, helping you identify which acquisition strategy best fits your goals and resources.
What Is a Strategic Acquisition?
Strategic acquisition is driven by long-term gains that are obtained by one company through the acquisition of another business. Usually, these buyers are existing businesses seeking to strengthen their market position, acquire new regions, get intellectual property into their portfolio, or expand their product offerings.
For instance, a regional HVAC company might acquire a smaller, similar firm in another city for the purpose of service expansion. Or a tech company might buy a startup having unique software to complement its product offerings.
Benefits of a strategic acquisition include:
- Increased market share and customer base
- Elimination of competition
- Access to new products, patents, or expertise
- Improved operational efficiencies through integration
Strategic buyers would often pay higher multiples because they look beyond short-term profitability. They see some value in how the acquisition fits within their long-term business vision.
What Is a Financial Acquisition?
Conversely, financial acquisitions are generally conducted by investors or private equity groups interested in making a return. These buyers may be unfamiliar with the business, its industry, or its operations. Profitability and cash flow for a few years, plus looking at possible resale values, are their priorities.
The potential business buyers assess on the basis of EBITDA, recurring revenue, and scalability. They might not implement many changes in operations, but rather hire experienced managers or retain the present team.
Key characteristics of financial acquisitions:
- ROI and cash flow-focused
- Often structured for resale in 3–7 years.
- May include leveraged financing and cost optimization
- Less emotional attachment to brand or legacy
Financing Considerations
Funding a purchase is a big deal, regardless of the type of acquisition. To do this, a business acquisition loan is usually obtained by strategists and financiers, for example, an SBA 7(a) loan. Such loans come with easy conditions but call for extensive paperwork, substantiated financials, and, most importantly, a comprehensive plan of how the business is going to be run.
The financing structure depends on the type of acquisition, the risk appetite, and the business history. The sellers are sometimes even willing to finance, mostly in private or minor deals.
Which One Is Right for You?
Depending on your background, resources, and long-term interests, you may want to consider one versus the other in an acquisition. If you already operate in the industry and are looking at operational synergy, then a strategic deal would make sense. If you are interested in diversifying your portfolio for some passive income purposes, then a financial acquisition would fit better.
Conclusion
For a business acquisition, the underlying motivation, be it expansion, investment, or competition, can have a large impact on the result. If these factors are considered properly, it will narrow down the choice for the business acquisition and allow for easily achievable goals with durable performance levels.
At Adam Noble Group, we help buyers and sellers all across Texas work through the complexity of acquisitions, matching intent with opportunity for successful outcomes.
About The Author
Contact Jeff Adam, PE, MCBC, FRC, CBB at Adam Noble Group, LLC
Phone: (817) 467-2161
www.adamnoble.com
During 3 decades of M&A service, Jeff Adam has successfully completed the sale of over 825 businesses and advised or completed 1,000’s of business valuations and exit plans. An entrepreneur in his own right, he has started and grown 12 companies in fields including international finance, B2B services, business valuation, construction, screen printing, Mergers & Acquisitions, engineering, and manufacturing. Jeff has donated his time as a distinguished speaker at numerous national & international conferences since 1977 covering topics such as environmental services, engineering, media, craft breweries, exit planning, business valuation, charitable giving, management, business brokerage and M&A fields.
Jeff is President of Adam Noble Group, LLC, a national M&A advisory firm, professionally valuing, exit planning, and confidentially selling profitable businesses owned by exit-motivated business owners to qualified strategic, corporate, private equity, partners, management, and financial buyers. The team establishes rapport, builds trust, and educates business owners in the steps to meet their goals as they prepare and achieve the discreet, confidential exit of their business. The firm exclusively represents sellers of $1M-50M value enterprises and endeavors to transfer their businesses to qualified, capable acquirers who will build upon the seller’s vision, goals, culture, and history. Jeff maintains lifelong repeat and referral relationships with sellers, their acquirers, and service providers.
Adam Noble Group has multiple M&A and business broker specialties: Manufacturing, Aerospace Defense Industry, Oilfield services, Technology, Construction trades, Craft Breweries, Partnership Buyouts, Service, and Wholesale Distributors.
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