Private equity vs strategic buyer: which one should buy your business?

What is the difference between a private equity firm and a strategic buyer?

A strategic buyer is a company that buys yours to strengthen its own business. A private equity firm buys to grow your company as a stand-alone business and sell it later. Each one pays for a different reason.

A strategic buyer is usually a competitor, a customer, a supplier or a company in a nearby market. It buys you for what you add to its operations: customers, products, people or territory. It can pay for savings and cross-selling that only exist inside its own company.

A financial buyer, such as a private equity firm, has no operating business to merge you into. It buys your company, backs your team and tries to grow the business. Accounting Department sums up the strategic side this way: strategic buyers “typically pay a premium for synergies and often absorb your company into their existing operations.”

Neither buyer is better in general. They solve different problems for different owners.

How do they compare side by side?

The two buyers differ most on motive, cash at close and what happens to your company. The table shows how they usually compare. Every deal differs, so treat it as a starting point for your own questions.

The numbers matter less than the structure. A higher cash price with no rollover can leave you with less total value than a lower cash price plus equity that grows. It can also leave you with more. Model both before you decide.

Which buyer pays more?

A strategic buyer often pays more cash at close. Axial says private equity firms generally make a lower offer than a strategic buyer. Simon Quick Advisors says strategics generally pay more cash up front.

The reason is synergy. A strategic buyer can cut costs or sell more through its own channels. That lets it pay more than your stand-alone numbers suggest.

Look at total value, not only the cash number. Altair Advisers says private equity deals usually include cash, rollover equity and a third piece: “earnout payments.” Private equity then offers a second payout when the firm sells the company and your rolled equity pays out. That second payout is not guaranteed. It depends on how the company performs and what the next buyer pays.

Ask each bidder for a plain breakdown of cash at close, rollover, earnout and any seller note. Then compare the same pieces side by side. Our guide on how private equity values a business shows how buyers build an offer.

When does a strategic buyer fit better than private equity?

A strategic buyer fits better when you want a clean exit and the highest cash at close. If you plan to retire and do not want a role or a stake afterward, a strategic sale can serve you well.

Choose a strategic buyer when:

• You want to be fully out within a short time.
• You want the most cash on closing day and little equity risk afterward.
• A buyer has a clear strategic reason to pay a premium for your company.
• You do not care whether the brand or the company stays independent.
• You have no management team ready to lead without you.

Be honest with yourself on the last point. Private equity relies on a management team that can run the company. If that team is not in place, a strategic buyer may suit you better.

Think about confidentiality too. A strategic buyer is often a competitor, a customer or a supplier. If the sale falls through, that company still knows your numbers. Sign a strong non-disclosure agreement and ask your advisor to release sensitive data late in the process.

When does private equity fit better than a strategic buyer?

Private equity fits better when you want to keep building and share in future growth. You sell part of the company, take cash now and keep equity for a second payout.

Choose private equity when:

• You want to stay involved and still lead the business.
• You believe the company has room to grow and want to share in that growth.
• You want your company and team to stay together as a stand-alone business.
• You want a partner with funds and experience in acquisitions and operations.
• You are comfortable with a board, reporting and a future sale in a few years.

The second bite of the apple is the main draw. First Citizens notes that many owners keep a minority stake, “giving them a chance to participate in the equity upside when the PE firm eventually exits the business.” The rollover equity guide explains how that stake works and what can go wrong.

Private equity also adds structure. You will likely have a board, monthly numbers and clear goals. Some owners find that useful. Others find it heavy. Decide which you are before you sign.

Where does Capstreet fit?

Capstreet is a Houston private equity firm, founded in 1990. Its published criteria are “$3 to $15 million of EBITDA,” “Primarily majority investments,” and “Entrepreneurs reinvest alongside Capstreet.”

That makes Capstreet a financial buyer, not a strategic one. It looks for “a tenured team of owners or managers seeking a majority capital partner, with solid financials, a defensive business model, untapped growth potential, and competitive advantages within their market niche.”

Capstreet also says it typically invests “side-by-side with business owners” and structures transactions “so that the founder(s) retain an ownership stake.” It has made “50+ Platform Acquisitions” and “200+ Add-on Acquisitions,” so a company it buys may grow by adding other businesses. Our buy-and-build strategy page explains that model.

If you want an all-cash exit with no role afterward, a strategic buyer may serve you better. We would rather you know that now. If you want to keep building, read the deal criteria to see whether your company fits.

How should you decide?

Start with your goals, then test each buyer against them. Write down what you want in five areas: cash, role, legacy, timeline and risk. Then ask each bidder how its offer meets each one.

1. Set your goals. Decide how much cash you need at close and how much risk you accept after.
2. Define your role. Decide whether you want to leave, stay for a transition or keep leading.
3. Run one process. Invite both strategic and financial bidders so you see real offers side by side.
4. Compare the full offer. Add up cash, rollover, earnout and any seller note.
5. Check the buyer. Ask for references from owners who sold to that buyer. Our guide on how to choose a private equity partner lists questions to ask.
6. Plan for your team. Ask what each buyer will do with your people, brand and locations.

Expect each buyer to run due diligence before it closes. The letter of intent sets the main terms, so read it with your lawyer before you sign it.

An investment banker or advisor can run a competitive process and compare offers. Read our guide on working with an investment banker or advisor before you hire one.

Next step

If you want to see whether your company fits a private equity partner, start with our deal criteria and the page on selling your business to private equity. When you are ready to talk, contact Capstreet for a confidential conversation at 713-332-2700 or connect@capstreet.com.