Financial Acquisition - Advantage Buyer
In a financial acquisition, the entire return on investment to the buyer derives from the after-tax profits and cash flow that the seller provides as a separate and distinct entity. For example, big company A buys small company B and sets it up as a wholly-owned subsidiary, which operates essentially as it did before it was sold.
If you have any doubt that the financial acquisition favors the buyer, consider this. It is the predominant method for determining the purchase price in the context of a “roll-up” (the acquisition of multiple companies in an industry.) The objective of the buyer is to put together a group of companies that is much more valuable than the sum of their individual values. The buyer seeks to buy low, in a series of financial acquisitions, and sell high as a large, attractive strategic acquisition.
Strategic Acquisition - Advantage Seller
In a strategic acquisition, the return on investment to the buyer derives from a number of sources, not just one, including:
1. The after-tax profits and cash flow described above;
2. The additional after-tax profits and cash flow the seller generates as a result of the change of ownership;
3. Most importantly, the additional after-tax profits and cash flow that the buyer generates because of the acquisition.
Say, for example, that the buyer is ten times the size of the seller. If the buyer increases earnings by a mere 10% as a result of the acquisition, that would produce the same dollar result as doubling the seller’s earnings. This is where the real money is in selling your company. If you can turn your company into a highly valuable strategic acquisition candidate, you have the potential to increase the selling price significantly.
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