Financial buyers invest in businesses or securities to earn a return. They may manage the asset themselves or rely on professionals. They consider assets, liabilities, cash flow, contracts, and product lines to determine profitability. They may merge underperforming companies to create a prosperous entity.
Financial buyers are people who are interested in securing an investment as a means of earning a return on that investment. Buyers may focus on activities that involve the acquisition of businesses as a means of generating returns, or the purchase of stocks, bonds and other securities to create a constant return. A financial buyer may choose to be directly involved in the management of the acquired asset, or rely on professionals to oversee the investment on their behalf.
Using the example of acquiring a business as an investment, the financial buyer may choose this approach for a number of different reasons. The buyer may be a former executive with a competitor; Buying the company and stepping in to manage the acquisition effectively allows the buyer to create a new position and makes it possible to manage the asset using strategies that the former employer did not allow. Sometimes the buyer may buy a business that is not doing well, but has excellent potential to be profitable. Here, the idea is to step in, save the business, and turn it into a true growth company. If the buyer wants a business that already has a strong market position and produces fair profits, they can retain the company’s management team, collect their periodic returns on investment, and have very little to do with day to day trading.
Whatever the motivation for buying a business, the financial buyer will take a close look at various aspects of the business operation. The ratio of assets to liabilities is key in determining whether the purchase is likely to produce a return. The buyer will also consider the cash flow of the business, including the current status of accounts receivable. Depending on the industry, the buyer may be interested in any contracts that involve larger customers, and the payment terms extend to those customers. Product lines are also often important to a financial buyer, especially in situations where the products involve technology that may or may not be obsolete in the next few years.
In general, financial buyers want to secure assets that offer a fair return on investment, or that can offer a decent return on invested capital if a turnaround strategy would restore business profitability. It is not unusual for a financial buyer to be involved in mergers and acquisitions that take two or more underperforming companies and combine them into a new entity that is capable of achieving a level of prosperity that smaller entities could never have achieved. As a result, the buyer obtains an asset that provides a long-term return and provides a return on investment that is considered attractive and worth the effort.
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