When purchasing a business, buyers tend to fall into two categories, Strategic Buyers and Financial Buyers. Financial Buyers are made up mainly of investors, like private equity or venture capital firms. While Strategic Buyers tend to focus more on the synergies the potential acquisition can create. These synergies can fall into various areas and lead to increased revenues or costs savings that would otherwise not be realized as a single company.
According to the Corporate Finance Institute, below are just a few synergies that companies may benefit from:
COST SAVING SYNERGIES
Information Technology: The cost of purchasing existing software can be very expensive and doesn’t always provide the perfect solution for the business. However, developing a proprietary solution custom to the company’s needs can be even more costly and time consuming. For these reasons, technology is one of the key strategic synergy’s buyers look to acquire through another firm. Regardless of size or client base, if the target company has a great production system solution that would work well for their needs it can be very valuable to a strategic buyer.
Efficiencies in the Supply Chain: The supply chain consists of all areas of operation from sale to delivery. This includes employees, vendors, technology, resources amongst others. In terms of employees, often a target company may possess the leadership that the parent company is lacking, or they may include subject matter experts that would increase the value of the product or business seller services. They may also have relationships with vendors that provide a better rate on services or materials.
REVENUE GROWTH SYNERGIES
Complementary Products: To promote growth companies may want to add a compatible product or service to their offering. While it may be a similar service, it can require specific expertise to seamlessly add this to their mix. Acquiring a company with the people and systems already in place will save time and money and bring a more immediate added revenue stream to the business.
Geographic Footprint: Some companies services are specific to a geographic area. Whether they are confined to a mile radius or even the entire state, purchasing a competitor in another region immediately expands their service without the need to start from scratch.
Whether for revenue growth or cost savings there are a wide variety of strategic synergies that can be gained when seeking to purchase a business. The above are just a few examples of the benefits strategic buyer can gain from buying the right target. It is important for a business owner who is looking to exit their business to keep these in mind as meaningful synergies obtained from a strategic buyer can substantially increase business value in many situations. A qualified business intermediary or business broker should be able to guide you regarding potential additional value created through strategic acquisitions.