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Les Nemethy
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Les Nemethy is the CEO of Euro-Phoenix Financial Advisors Ltd. (http://www.europhoenix.com) a Central European corporate finance company focused on Mergers & Acquisitions. http://twitter.com/europhoenixnews
My company:
Euro-Phoenix Financial Advisors
My blog:
Corporate Finance / M&A Corner
  • Does a financial or strategic investor better suit your purposes? 0 comments
    May 15, 2009 6:55 AM

    Your business is one of the many businesses that needs additional equity capital, then you have a basic choice: do you seek the expertise and capital of a financial or strategic investor? The two have very different implications.

    Financial investors, broadly defined, include venture capital funds (for start-ups or companies early into their life cycle), angel investors (for small companies) and private equity funds.  As the name implies, “financial” investors typically bring equity finance and expertise primarily of a financial nature, although many financial investors also pride themselves on bringing value-added knowledge in other areas, such as corporate governance, restructuring or sometimes even expertise in specialized sectors, such as logistics or food and beverages. Each financial investor will have criteria for eligible investments that are clearly set, such as geographic scope, minimum and maximum investment size or sectors of preference. 

    Strategic investors have an industry specialization and would include multinational corporations or mittelstand companies seeking to go international. Locally, there are an increasing number of CEE companies developing a strategy to acquire and grow throughout the region, which seem to an account for an ever-increasing proportion of overall CEE investment activity.

    Whether you target a financial or strategic investor depends on your objectives. For example, my company has a client who insisted on a strategic investor, because he wanted to exit his business as soon as possible and didn’t want to stay on for the several years, as a financial investor would generally require. A different client insisted on a strategic investor because he had a very successful concept locally and wanted the cross-selling synergies of services that a strategic investor would bring. Another insisted on a financial investor because he had intellectual property to which he did not want a potential competitor to have access.  Many clients will solicit interest from both strategic and financial investors.

    Offering your business to a financial investor will typically take a higher degree of preparation. You will need to have an extremely thorough business plan with cash flows that may be relatively accurately forecast over at least a five-year horizon, including revenues, expenses and capital expenditures (capex). 

    Despite difficult financial market conditions, it is possible to find both financial and strategic investors, provided your business is sufficiently attractive and valuation expectations are realistic.

    The chart below summarizes some of the key distinctions between financial and strategic investors:

      

     

    FINANCIAL INVESTOR

    STRATEGIC INVESTOR

    Control

    Typically allows the local owner day-to-day operational control. Some will insist on owning at least 51 percent, others will agree to take minority interest.

    Will typically require total control, as a strategic investor will typically be focused on merging into global or regional operations, to gain synergies.

    Expertise

    Typically brings great financial expertise, as well as in some areas of operation, possible expertise in corporate governance.

    Typically brings know-how, technology, systems, access to markets and operating expertise, within the sector in question.

    Time Horizon

    Typically a three to seven-year investment horizon. Will want to know the exit strategy even when considering investing.

    Long-term focus. Generally not concerned about exit.

    Motivation

    Very focused on financial returns over the above time frame (e.g. typically a return in excess of 25 percent per annum). Will normally require a detailed cash flow forecast demonstrating returns.

    Not as concerned about rate of return. More concerned about operational synergies with the investor’s existing operations. May or may not require a cash flow forecast.

    Management

    Quality of existing management is generally vital to the transaction, as financial investors will typically try to tie in the management for at least several years with equity participation.

    Quality of management is important for many strategic investors, but not for others who have their own management that can be “parachuted” into the company.

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