Cons of doing a deal with financial buyers:
1. A leveraged balance sheet. To varying degrees, financial buyers use leverage to improve returns. Too much leverage in a cyclical industry can spell doom.
2. May not understand, or have little patience for, your business when times are tough. Financial buyers are in charge of other people’s money. If they lose it, they will quickly be out of business. Expect them to act accordingly.
3. Generally, the investment horizon is short. Financial buyers have to return the money they’ve taken at some point, which usually means a sale of the business within 3-5 years. 3-5 years is a short time when you’re thinking about stability for your people.
This type of buyer is very active with the broker and investment banking community, so you’ll see them in sale processes for larger firms (generally, $5 million or more of [glossary]EBITDA[/glossary] is the smallest deal this community will chase.). You may also see or meet them at conferences where they’re attending to drum up deals, meet with prospective targets, executives, etc.
Watch for Part III of this series in which we discuss Hybrid buyers, in the next issue of LBM Journal.