M&As (mergers & acquisitions) are daunting processes and many businesses are afraid of them. This is understandable, because companies are literally swallowed up by giants through M&As. Not just that, the financial constructions involved in it are highly complex and require extensive knowledge. However, having a baseline understanding of the role of the seller and the buyer may simplify the entire process to a degree.
The seller can be anyone from a single individual to a huge number of shareholders. Their number is not significant. Rather, it is their collective desire to sell a company that matters.
There are three types of buyers out there: public investors, strategic buyers, and financial buyers. The latter have a business model built on buying, developing, and selling other businesses. They acquire companies because they have good strategies in place for prospective growth, and financial buyers hope to profit from the cash flow generated during operations and the eventual capital gains when selling.
All businesses go through a lifecycle, ranging from startup to a mature company. Financial buyers usually focus on one specific part of this lifecycle, although there is some overlap as well. Financial buyers, therefore, can be:
- Angel investors, who tend to be individuals with a high net worth choosing to back a specific entrepreneur at the startup phase. They work together with venture capitalists, ensuring newly founded companies have the funds they need to start their business.
- Venture capital firms, who usually have a pool of money available. They are similar to angel investors in as such that they focus mainly on startup companies. However, their pools of money are very large, which means that the startup companies they work with have been operating at least for a short period of time.
- Private equity firms and private equity investors like Greg Lindae, who manage pools of financial investors, usually from wealthy individuals, trusts, pension funds, fund-of-funds, and endowments. Typically, they invest in more mature companies, who already have a good market position, sustainable cash flow, a solid revenue base, and a competitive advantage. However, these companies should still have good growth opportunities and the private equity firms will help them to expand within these opportunities.
Most private equity firms use a pool of capital to make their investment. They also work together with sponsors, whose role it is to scout possible opportunities. They identify businesses that have the potential to experience sustainable growth if they find an investment, and recommend these to people like Greg Lindae and other private equity firms. Whether or not the firms accept these recommendations, however, is not guaranteed. Private equity firms have very stringent acceptance criteria and take a great deal of time to research the potential for growth that they claim to have. Because these investments often reach in the millions of dollars, demand for private equity specialists is incredibly high. However, while they have large pools available to them, they only choose to invest this in a select group of companies.