Financial vs. Strategic Buyers – What’s The Difference?

When you go to sell your healthcare business, you’ll run into two main types of buyers. Some will be looking to buy your business for financial reasons while others will be looking to buy for strategic reasons. It’s important to understand the difference between financial and strategic buyers so you know what to expect during negotiations and can also decide which is best for your goals.

Financial buyers

Financial buyers are interested in buying your healthcare business purely as an investment. These are often private equity funds who think that through a small investment of time and money they will be able to resell your business for a profit in the near future. Others are looking for a platform company, which is their first purchase in the healthcare industry which they can eventually expand with future acquisitions.

Since financial buyers have more of a short-term focus and need to ensure a profit, they typically can’t pay as much as strategic buyers. They will see your company’s valuation based on its current financial performance and will set their price based on that. They can’t overpay based on the long-term growth potential because chances are they will sell again before that offers any benefit.

An advantage of this short-term focus is that financial buyers typically aren’t interested in making significant changes to how your company operates because they aren’t looking to absorb your company into an existing healthcare business. This means they won’t make big changes to your staff, won’t abandon your company culture, and would likely be willing to let you stay on-board for a few years to continue managing, if that’s what you want. They would need your help since they don’t have the necessary experience themselves.

Strategic buyers

Strategic buyers are interested in the long-term business value of your healthcare company. They are usually existing healthcare companies who want to bolt on additions so they can continue to grow. They believe they can improve their performance by taking over your company, say by expanding into your location or by taking over medical services that they don’t currently offer.

Strategic buyers are typically willing to pay more than financial buyers because they have a more long-term focus. They can pay more than the standalone value of your company because they think that they will achieve even higher returns through the acquisition. They may be able to create synergy by combining services and by cutting costs through removing duplicate functions. Financial buyers don’t have this capability because they aren’t already in the business.

In exchange, strategic buyers will most likely change how your company operates and could lay off staff. They may not want you involved in the future because they have their own way of running things. This can be tough to see after you’ve spent years building up your business.

Finding the right fit

Whether a strategic or financial buyer makes sense depends on your goals. If you’re looking to get the highest possible sales price, you’re best off going with a strategic buyer. Financial buyers really can’t afford to pay more than the official valuation of your firm whereas strategic buyers are more willing to overpay, especially if they think your business would be a great new addition.

On the other hand, if you want to protect your company culture and also would like working for a few years after you sell, a financial buyer could be a better fit. They are less interested in immediately cutting costs, like letting staff go, and would want your expertise in the near future. You may be able to make up some of the lower cash price through some sort of performance compensation, like through an earn-out.

Both strategic and financial buyers can be useful in the right situation. By thinking about your goals for your sale, you can figure out what type of candidates to target for your upcoming deal.