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Financial buyers are individuals 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 in order to create a steady 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 his or her behalf.
With the example of acquiring a business as an investment, the financial buyer may choose this approach for several 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. At times, the buyer may purchase a business that is not doing well, but has excellent potential to become profitable. Here, the idea is to step in, save the business, and build it into a true growth company. If the buyer wants a business that already has a sound market position and produces equitable earnings, he or she may retain the management team of the company, collect his or her periodic returns on the investment, and have very little to do with the day to day operations.
Whatever the motivation for purchasing a company, the financial buyer will look closely at several aspects of the business operation. The ratio of assets to liabilities is key to determining if the purchase is likely to produce a return. The buyer will also consider the cash flow of the business, including the current state of the receivables. Depending on the industry, the buyer may be interested in any contracts that involve larger customers, and the payment terms extended to those clients. 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 within the next several years.
In general, financial buyers want to secure assets that offer an equitable return on investment, or that would be able to offer a decent return on invested capital if a turnaround strategy would restore profitability to the business. It is not unusual for a financial buyer to engage in mergers and acquisitions that take two or more companies with lackluster performance and combine them into a new entity that is capable of achieving a level of prosperity that the smaller entities would never have accomplished. As a result, the buyer gains an asset that provides a return over the long-term and provides a return on invested capital that is considered attractive and worth the effort.