When you decide to sell your business, you know you need a buyer. But which buyer is right? There are benefits to the two primary types of buyers, financial and strategic. Understanding the difference can help you make the right decision for your company.

Strategic Buyers

The 2016 Private Capital Markets Report published by Pepperdine University reports that 57% of successful business sales were to strategic buyers. That’s likely because strategic buyers tend to offer a higher price than financial buyers. Again, according to Pepperdine, 50% of sellers were able to get a strategic buyer to pay premiums between 1-20%.

Strategic buyers already run companies. They may be competitors, customers, or suppliers seeking an increase in market share. They may come from a different industry, and seek a chance to diversify revenue streams. Before making a purchase, these buyers look closely at companies to determine if the services or products available can be worked into their current business structure, thereby creating shareholder value.

— PROS

Strategic buyers are often willing to pay highly for an acquisition, but the benefits don’t end there. Strategic buyers enable a seller to completely walk away, while getting the most liquid value. They also use their industry experience to close more quickly, and can create operational strategies that boost efficiency.

— CONS

This doesn’t mean strategic buyers are always the best fit. A merger of two businesses can duplicate many roles, particularly at management level. Management can lose jobs or positions in leadership. Brand loyalty can dissipate. Company culture may deteriorate, especially for employees. If a deal with a strategic buyer falls through, the strategic information they have gained about the business may negatively affect the company’s future.

Financial Buyers

Financial buyers come in many forms, but private equity firms are the best known. Hedge funds, family offices, ultra-wealthy people, and venture capitalists also fit into this group. These buyers see the purchase as an investment with a goal of eventually selling the business at a profit or putting up an IPO. They look for companies with high growth potential and key competitive advantages, and may seek to purchase them at a discount during a time of corporate upheaval or financial difficulty.

— PROS

Financial buyers seek a lower price, but they do offer other advantages. A lower initial valuation may still offer longer term rewards. For example, if you wish to stay involved with the business’s daily operations, financial buyers often offer this. A financial buyer is less likely to disrupt your business, reducing the very real risk of employee or customer dissatisfaction or anxiety. Your relationship with a financial buyer may also help you in the future. After all, access to funding is always a good thing.

— CONS

Financial buyers don’t typically pay in cash. They use debt to finance up to 50% of the purchase price. This large debt load reduces financial flexibility, and narrows your margin of error. Deals with financial buyers take longer to close, and demand extensive due diligence because of the involvement of lenders. Investor financial reports demand lots of details. If you don’t want to be involved in the daily company operations, this might not be the right choice. You might one day be able to scale back your involvement, but at the outset, your participation is virtually mandatory.

Before you sell your business, you need to know exactly what you want. Don’t make your decision based on which buyer appears to you first, or on emotional considerations. Instead, go into the sale with clear expectations and goals. This allows you to determine which type of buyer is appropriate, and to select from the buyers who make themselves available. Knowing the right type of buyer can also enable you to take proactive steps to ensure your business appeals to your ideal buyer.