Strategic vs. financial buyer: choosing the best option.

• Author: Kearney, John D. 'Jack', Sr.
• Position: Deals and Dealmakers

Regardless of the current media concentration on the pros and cons of private equity firms and investments, those who work in the business or those considering entering a partnership with a PE firm face a decision-making process that can be complex and complicated. Financial executives face myriad complicated decisions when taking on private equity funding.

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Thus, before entering into a partnership with a PE firm, financial executives should arm themselves with an in-depth knowledge of the value these business relationships can offer and whether they are a better option than a strategic buyer relationship.

From understanding various investment and exit strategies and operational expertise, to knowing how to manage these new relationships and emerging interests, such information is vital to developing a mutually beneficial partnership with whichever buyer is chosen.

The majority of private equity fund managers (70 percent) expect to close only two or three platform deals in 2012, according to the third annual PErspective Private Equity Study, conducted by BDO USA LLP. This is an increase from 2011, when 47 percent of fund managers reported closing no new deals.

Private equity and strategic buyers come with their own set of financial and ownership objectives, which will undoubtedly have a critical impact on the initial transaction as well as the operation of the company after the transaction closes. Financial executives seeking capital can ready themselves for the possibility that they may be charged with navigating one of those deals this year.

Choosing a Suitable Partner

So how is a partner chosen? First, know how each potential investor operates and which one will enable the firm to meet its objectives. Let's examine the options:

* Strategic buyers, companies already in similar lines of business, are focused on enhancing their existing business model and the resulting financial return to their shareholders from the purchase of the target company. This type of buyer also includes portfolio companies of private equity firms that are functioning as acquisition platforms.

* Financial buyers, most prominently private equity firms, are companies that may have experience in a similar industry, but are not currently in the line of business of the target company. Their primary focus will be looking at the company as a standalone investment with the potential for internal growth of revenue, earnings and free cash flow. A secondary focus will be on achieving external growth by converting the company into an acquisition platform.

On behalf of target company owners, financial executives have several strategic issues to address in connection with the...