There is no black or white answer to this as the “best buyer” for a business depends on a number of factors and it’s not always just the one that will pay the highest price. There are pros and cons to both strategic buyers and financial buyers and this can be a complex issue. Let’s start with exactly what we mean by a strategic vs. financial buyer.
Strategic buyers generally come in two forms with different motivations to acquire a business. There are those that are in the exact same industry and look very much like the acquired company but are just much bigger. They are looking to acquire a company purely for the incremental scale and market share that the acquisition brings, and this is generally a purely financial discussion. They will pay standard industry multiples for similar businesses and are primarily bargain hunters. Then there are strategic buyers that may be in similar or adjacent industries and are looking for new market opportunities or some sort of strategic or competitive advantage from the target company. This includes access to new geographic markets, new or incremental distribution channels, access to complementary or synergistic products, access to new technology (or keeping technology out of the hands of competitors), or other intangibles such as adding some “spice” to a public offering or a floundering stock price. Depending on the strategic need of the acquirer, they will often pay a premium for the target company and in some cases will well overpay for the right fit. This is especially true for technology companies that have truly unique IP or a highly differentiated business model. This is by far the best scenario but also the hardest to find.
Financial buyers can come in the form of high net-worth angels, search funds (single-purpose funds looking to acquire only one business), family offices, and private equity firms. Angels or search funds want to buy a single company, work the business, grow it and sell it down the road and generally come from that specific industry. Private equity funds and family offices are large pools of capital that are used to buy a portfolio of companies, grow them and sell at a profit. They generally look for more mature companies with significant stable cash flow (usually a minimum of $3M EBITDA). They realize gains by growing the business over 5 – 7 years through both organic growth and acquisitions. These firms are primarily playing an arbitrage game as they can acquire smaller companies at lower valuation multiples and once they aggregate a critical mass of revenues, can exit at much higher multiples. These firms often look for a larger foundational company to serve as the “platform” business and then add additional businesses as “add-ons” or “tuck-ins”. Private equity firms generally want founders to stay on with the business and maintain a carried interest in the larger enterprise and often provide founders with the opportunity for a 2nd exit when the rolled-up enterprise is sold. This can be a very attractive opportunity for a founder particularly if their growth has been handicapped by a lack of growth capital.
So, in the end, the best buyer for a business could come from any of these categories and is highly dependent on the industry, the state of the particular business being sold, the objectives of the founder in selling the business, and in many cases just the timing of having the right product or technology at the right time for the right buyer.