We will be taking a detailed look at how owners of knowledge economy businesses can make their company more attractive and valuable to buyers / investors in an upcoming webinar.
In the knowledge economy sector, the majority of deals are undertaken by strategic buyers. The involvement of private equity firms in the knowledge economy sector has traditionally been cyclical, although recently there are many actively acquiring private equity investors within the sector.
When considering a sale, it is important to understand the differences in the way these two buyer groups approach assessing and evaluating transaction opportunities to ensure you are positioning your business appropriately with the right buyer.
Strategic buyers are non-private equity investors with existing businesses looking to fund an acquisition as part of their existing operations. They are typically focused on enabling revenue growth synergies as part of their acquisition of a knowledge economy firm. Private equity buyers are firms investing private capital into businesses that demonstrate standalone growth, stability and high profit margins. This capital is leveraged to grow the company with the aim of selling it at a profit. In contrast, strategic buyers look to an acquisition in their pursuit of synergy opportunities.
Both private equity and strategic buyers consider a combination of qualitative and quantitative metrics when evaluating a business’s worthiness for an acquisition. Furthermore, metrics will vary depending on the specific buyer and their characteristics. Given private equity firms’ objective to invest in a knowledge economy firm for profit, there is a greater focus on quantitative metrics such as profit margins, growth rates, gross margins revenue per employee and employee utilization rates. For private equity firms, these metrics are used to form projections which feed their returns models and generate an assessment on the likelihood of cash returns from a business. In contrast, strategic buyers place greater value on qualitative metrics such as cultural fit, quality of client base, range of crossing-selling opportunities and value of intellectual property (IP). For strategic buyers, having the right culture fit is important in enabling better collaboration, which is integral to improving the revenue growth synergies of the partnership. Working with an experienced financial advisor will help you to understand the specific objectives of a buyer showing interest in your business and position the transaction opportunity appropriately.
Depending on the seller’s business goals, the type of buyer they partner with has a significant impact on the strategic opportunities available to them. For example, partnering with private equity buyers affords the seller the opportunity to enter new markets and geographies, guided by expert advice and unique market access to help achieve desired market penetration. Ultimately, it is important to understand how different buyers approach assessing and valuing knowledge economy businesses to ensure you are positioning your business appropriately and partnering with a buyer whose business strategy aligns with yours.