Types of Investor’s Seeking Acquisitions
There are generally three types of investors seeking an acquisition: Strategic; Private Equity Company; or Individual Private Investors.
A strategic buyer is looking to purchase companies that offer some of the following opportunities:
- Gain new technologies to improve efficiencies
- Gain new products or services to offer to their distribution network
- Fill excess capacity that they may have on their existing equipment
If the selling company serves a market that is receiving high multiples, say 5 to 6 times, a strategic buyer will be quite competitive. They will have synergies that help offset the higher multiple. Those synergies may lower the actual multiple paid to 3.5 or 4 times.
A private equity company is typically a company that has been purchased by an equity firm that is seeking to do a rollup of small- to medium-size companies within the same market. The PE company is seeking the same synergies that a strategic buyer is, but is also looking for economies of scale. An example of this would be greater buying power of raw materials. A PE company is not going to stay with this investment for a long period of time, 5 years is a norm. Their plan is to flip (sell) the now larger entity at a multiple greater than what they paid.
Personal investors are typically individuals with deep pockets looking for sound investments or becoming backers for individuals who show promise to grow a target company that will produce an economic gain. A personal investor is looking to put as little of his or her money into the deal, borrow against the assets acquired, bring on senior debt and, most importantly, will be looking for the seller to take back paper (debt) to help fund the proposed acquisition. In many cases, the senior lender requires the seller to participate.
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