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Edmonton Business Broker – Tip of the Day

What Type of Buyer is Right for Your Company?

Part 2 of 3

An additional consideration for strategic buyers is the clarity of historical corporate records. Large business buyers are particularly sensitive to possible liabilities (licensing issues, outstanding contracts, taxes, etc.) that they may become liable for upon purchase. Therefore, as is the case with virtually all transactions, it’s recommended that any outstanding issues be clarified prior to discussions with a strategic buyer.

The advantages of dealing with a strategic buyer include:

  • Their expertise in closing  transactions often expedites the closing
  • They generally have a wider range of deal structure and financing options than other buyer segments
  • They usually have sufficient resources (both financial and otherwise) to support company expansion and growth

Possible disadvantages include:

  • Absorption of the seller’s  operations into the buyer’s operations may be required
  • Contingent payments, that depend upon the tracking of financial performance, may be harder to monitor because of the difficulty of keeping separate records
  • Some employee positions may be eliminated due to consolidation of operations or elimination of back office functions
  • There is often a resultant  change in corporate culture

Private Investment Groups (also known as Private Equity Groups)
Private Investment Groups represent a formal fund (or a number of related funds) created by a group of investors for investment in, and purchase of, closely held businesses.

The strategy and focus of these groups varies widely. Some groups focus on a certain industry segment, while others are more concerned with the geographic location of the target. Certain investment groups may achieve the same synergies with an acquisition as corporate buyers, particularly if the group is building a portfolio of businesses within a specific industry. In any case, the Private Investment Group’s primary focus is to achieve the highest possible financial return for its investors.

Since investment groups generally prefer to let their portfolio companies continue to operate on their own, the preference is for the existing management team to remain after the sale. Additionally, these groups usually have a planned exit strategy and expect to hold a portfolio business for a pre-determined period of time – usually between five and seven years.

The advantages of working with an investment group include:

  • With professional buyers the  closing of the transaction is often expedited
  • They often provide access to   resources the seller may not have (managerial talent, financing, etc.)
  • Their equity capital has  usually already been raised
  • The acquired company  generally experiences little culture change

Possible disadvantages include:

  • The requirement for  management to stay may conflict with the shareholders’ exit plans
  • The transaction may not  offer synergies with other portfolio businesses
  • As cash flow-oriented buyers, these groups usually pay a fair but not premium price for the      businesses they acquire
  • The company may face being  sold again within five to seven years


Brought to you by:

Dwight Lester, Performance Business Brokers, Edmonton Alberta

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