Knowing Your Buyer Type: Strategic Buyer vs. Financial Buyer

October 27, 2021

As you work through the decision to sell your dealership, it is important to understand that all buyers are not alike. Buyers have different priorities and objectives as they consider whether your automotive retailing operation is a “good fit” as an acquisition. Knowing these differences can help create the most successful possible deal for both parties.

The two main types of buyers in the M&A market are strategic buyers and financial buyers.

Strategic Buyers

Strategic buyers are usually firms that are already established in the automotive retailing space. They’re likely looking at purchasing your dealership as a way to capture synergies. A strategic buyer believes that adding your dealership to their existing group will create certain benefits that are greater than the sum of their parts. These synergies can be accomplished in a variety of ways, once your operation has been combined with their existing organization:

  • Reduced marketing expenses (one more rooftop added to their existing “brand”)
  • Geographic expansion (if you’re located in an area that the buyer is yet not established in)
  • Lower overhead (reduction of headcount in management, consolidation of marketing and back-office functions)
  • Increased sales (through more efficient marketing, more cars sold, and improved F&I/fixed ops revenue)
  • Improved margins (your location is no longer a competitor, so it can’t undercut their pricing)
  • Enhanced productivity (using the buyer’s “leaner” systems to boost economies of scale)

A strategic buyer has a growth plan that endeavors to make two plus two equal five. Because of this aggressive and optimistic outlook, a strategic buyer is usually willing to pay more for your dealership. This higher price consists of the actual value of your business, plus some consideration for the added value it will bring to the buyer’s bottom line once the synergies are realized. Other items that can add value to the sales price are optimal locations, owned assets, experience of the team, and proprietary processes.

Where strategic buyers get their money

Most larger strategic buyers have cash on hand for acquisitions, eliminating or reducing the need to incur debt. They can also issue stock as part of the transaction. This gives a strategic buyer more leverage and flexibility when structuring the deal for your dealership. It also allows a strategic buyer to be more generous and pay you a premium. You, the seller, will benefit from any stock appreciation that accrues over time, if that should become part of the final deal.

How a strategic buyer looks at your EBITDA

Strategic buyers have plenty of cash and a bigger picture in mind. If they believe that the synergies and added value from the addition of your store to their portfolio will justify a higher multiple, they may aim to cut out competitors by paying you a higher price, even if your EBITDA is low or negative.

Where you stand after a sale to a strategic buyer

A strategic buyer typically wants to purchase 100% of your dealership and integrate it with its other complementary business units. Unless you negotiate an employment contract with the buyer, you simply take the money (along with any stock) and walk away.

Financial Buyers

Financial buyers are a different breed. They are looking at your dealership as a stand-alone investment that is expected to provide a specific return. The financial buyer will focus on things like management quality and cash flow, along with a defined exit strategy that provides an opportunity to cash in on their initial investment. This exit strategy could be a sale or even an IPO. Financial buyers can include:

  • Private Equity Companies
  • Venture Capital Firms
  • Holding Companies
  • Family Offices
  • High Networth Individuals

Financial buyers can have a wide range of time periods for their investments, ranging from five or more years to an indefinite period. They typically are not interested in taking over the business and running it themselves. Financial buyers want to make their investment, have the existing management team grow the business while they own it, and then, down the road, net a profit if and when they exit the business.

Where financial buyers get their money

Financial buyers typically use debt to finance their acquisitions. As a result, they must be sure that your company has enough assets and cash flow to service that debt. These assets can include your dealership’s property, its plant, and its equipment. This acute awareness of debt levels is what keeps a financial buyer from overpaying for your dealership – too much debt could sink them! Either way, they have to consider the long-term interest, on top of the initial price, when assessing the total cost of their acquisition.

How a financial buyer looks at your EBITDA

Because a financial buyer is using debt to purchase your facility, the business itself needs a decent EBITDA to support the debt payments. Because of this, financial buyers will not usually pay over a standard industry multiple. If your EBITDA is not sufficient, a financial buyer is unlikely to be interested in buying your dealership

Where you stand after a sale to a financial buyer

A financial buyer usually wants to purchase a controlling interest in your business but does not desire 100% ownership. Because the financial buyer wants the existing management team to remain and grow the business to reach the buyer’s financial projections, the seller and the managers will usually be provided with enough equity to be properly incentivized to reach these goals. This may be in the form of “rollover equity,” wherein part of the purchase price is used to make the seller and the management team into minority owners of the continuing business.

Depending on your goals, this is potentially the main advantage of going with a financial buyer.

The equity from the deal that is held by the seller and managers is a strong incentive for them to align their interests with those of the new owners. This is an added benefit that a financial buyer can bring to the transaction. Any income that flows from this equity participation can also help financially if you are planning to retire or start a new business venture.

Which type of buyer is the right one for your dealership sale?

Here are some questions to ask yourself as you prepare to put your dealership on the market:

  • Do you want the highest amount of money up front and don’t care what happens after you are paid?
  • Do you want to preserve the jobs of your staff and managers?
  • Do you want to stay involved in the operation of the business?
  • How fast do you want the deal to go through?

Keep in mind that many strategic buyers may have financial motivations, while some financial buyers can also have strategic concerns. It’s not a fine line, but being familiar with both ends of the spectrum will help you navigate the acquisitions market as you move toward your dealership sale.

DCG Acquisitions is experienced in negotiating dealership sales with all types of buyers – from strategic to financial and all points in between. We’ll always help you successfully navigate the sale of your dealership to the best available buyer.

DCG Acquisitions is committed to optimizing your dealership sale

DCG Acquisitions is here to help you get the most value for your dealership sale. We’re one of the country’s leading, and fastest-growing, automotive M&A firms. Our network of connections — with automotive manufacturers, financial lenders, dealership buyers and sellers, and more — helps us create a qualified, competitive environment on both sides of the sale. 

Contact DCG Acquisitions to speak with an Automotive M&A specialist and learn how we can help you get the most out of your next dealership purchase or sale.