What Is a Financial Buyer?

A financial buyer is a type of buyer in an acquisition that is primarily interested in the return that can be achieved from the purchase. The buyer is interested in what cash flow the investment will generate and what kind of exit strategies the investment will offer in the future, whether it be in the form of an initial public offering (IPO) in which the business is taken public or an outright sale.

A financial buyer is different from a strategic buyer, which evaluates an acquisition primarily on how it fits with the acquiring company's strategic goals. A strategic buyer, for example, might acquire a company because that company has a superior distribution network or has products or geographic territories that are complementary. The target company's financial condition would thus be a secondary consideration.

Financial buyers are often private equity firms that represent an alternative to company owners who want to remain involved in their businesses but need an influx of cash.

Understanding a Financial Buyer

A financial buyer is typically a long-term investor looking for a solid, well-managed company. They may not make any immediate changes, or they may implement changes designed to make a company profitable and thus more attractive to future investors.

Financial buyers may focus on how much cash flow a business generates, and they will also take into consideration possible exit strategies. They may seek to improve cash flows by growing revenues or by cutting costs. They may also merge with similar companies, thereby creating economies of scale. Exit strategies may include an initial public offering (IPO) or selling the company outright to a strategic buyer.

Key Takeaway

  • Financial buyers are long-term investors interested in the return that they can get by buying a well-managed company.
  • Financial buyers look to generate cash flow by boosting revenue, cutting costs, or creating economies of scale by buying similar companies.
  • Financial buyers are also focused on what exit strategies the investment or company might offer, such as an initial public offering (IPO) or even a sale.
  • Financial buyers are different from strategic buyers, who are more interested in how a potential acquisition fits into their own long-term goals.
  • Strategic buyers are often bigger companies that are well capitalized, able to spend more, and less focused on whether a company can generate quick cash flow.

Special Considerations

Financial buyers often use a significant amount of leverage in their acquisitions. And in effect, their lenders are acting as their partners in the transaction. Financial buyers are also more likely to keep on existing management when buying a company, rather than bringing in a new team to shake things up.

Unlike for strategic buyers, price is a very important consideration as it ultimately affects the return a financial buyer may achieve. Strategic buyers, on the other hand, may be willing to pay more for a company because they may see synergies that can be achieved in the long term. They also tend to be bigger companies with better resources and access to more funding than financial buyers.