The deal rationale is mainly a horizontal or vertical integration. The investor is either a direct customer or related to your industry, for example, a supplier. As such, the focus of a strategic investor is driven by strategic considerations.
Strategic investors often analyze KPIs that are relevant in the industry. These are benchmarked either against their own KPIs or against industry standards. For them, it is important to understand the positioning. This also includes the geographical footprint. In which countries does the company operate and which products does it offer? A synergy analysis plays an important role to understand the fit. This is not limited to financials, such as cost or revenue synergies. It also includes the cultural and operational fit. IT landscape matters here as the companies will need to harmonize their landscapes.
During the due diligence, strategic investors will look at employees. In general, they look at the employee structure, for example, average tenure, age, and departments. And in particular at the sales team to understand how leads and revenues are generated.
Financial investors cover private equity, venture capital, family offices, and other types of funds. Financial investors follow different strategies, like the buy-and-build and the turnaround strategies. With both strategies, financial investors want to create value. Financial investors hold their targets on average five to seven years. In this time, measures are implemented to sell the company at a higher price thereafter.
The focus of venture capitalists is somewhat different. This is due to the early stage of the company and the related lack of data. Their focus is not fully covered here.
Financial investors are looking for growth potential. Typically, the market, the company’s market share, and past revenue growth are analyzed. In a buy-and-build scenario, also the company’s track record of acquisitions matters. This indicates whether the company has already managed to integrate another firm successfully. In turnaround scenarios, a detailed cost analysis is conducted. This helps understand how to restructure the firm.
In any case, investors want to understand the firm’s growth case, including associated revenues and costs or investments. Ideally, the company has already launched new products or services in the past. This would also help assess the growth case.
Finally, key employees matter. How can they contribute to the success and the firm and what has been their track record in the past?
The financing banks don’t assess growth or product leadership. Banks focus on the balance sheet. They want to understand the existing debt and the debt capacity, any working capital and investment requirements. In particular, any seasonalitites (e.g. ramp-up of production requiring short-term financing). Also, banks analyze cash flow statements and cash conversion to assess if the company is able to cover its debt.