Kevin R. Hanson, Chief Executive Officer of the Ashton Group, appeared recently on Exit This Way with Kerri Salls.
Hanson has over fifteen years of experience advising boards of directors, management teams and investors in mergers and acquisitions, capital raising, due diligence reviews, and transition planning. With the Ashton Group, he offers strategies for companies to maximize the value of their shares. In his appearance on Exit This Way, Hanson discusses what buyers are looking for when acquiring another company.
Hanson describes how different types of potential buyers will view the same transaction differently. A potential buyer purchasing a company for investment (a “financial” buyer) will view the transaction primarily in terms of the possible return on the investment, and when it can be realized. Conversely, a potential buyer who is a competitor (a “strategic buyer”) will view it with an eye toward how the company and its resources can be integrated into a common facility or operation.
Hanson describes in detail on the differences. He describes a financial buyer, commonly a private equity group, as often looking to buy companies as a “platform”, or an initial investment in a space or market. They will determine the unique risks associated with the industry and the margins available in the industry. When selecting a particular company, a private equity group will consider whether and how it can grow the company, and exit the investment within 3-7 year timeframe. The goal of this type of buyer is to ensure they can make money and pay back their investors at the end of the customary ten year period of the group. With less interest in running the daily operations of a firm, a financial buyer is highly interested in the intellectual capital present in the management team and how key person risk is addressed, as these individuals are critical to the return on investment ultimately received.
In contrast, Hanson describes a strategic buyer as focused on how a target company can enhance or improve what the strategic buyer is doing today; where there are opportunities to cut costs and leverage common resources and people. In general, there is a longer time horizon in mind with a strategic buyer, as a goal is integrating the target company into one’s one business. As it will be more involved in the daily operation of the business, a strategic buyer will focus on how a seller’s management team can potentially enhance or supplement a strategic buyer’s existing management needs. The goal with a strategic buyer is integration and return on investment through shareholder value. Commonly strategic buyers are more apt to pay a premium for the investment.
Finally, Hanson concluded his informative interview by discussing the consideration of economic and market risk, some valuable strategies for sellers to consider, and some distinctions in the types of due diligence.
To read more, or to hear the complete interview, please click here.