A strategic buyer will generally be the best bet for acquiring your mid-market tech company, where there is a good strategic rationale, as it is more likely to provide a higher valuation than a financial investor.

When strategics want an asset in the current market, financial investors are not going to be able to outbid them. The benefit of lower capital costs alongside synergy opportunities will always have an advantage over financial investors, such as private equity or venture capital firms, who have higher IRR hurdle-rates.

A financial investor is either looking for a platform investment or an add-on investment where generally the motivation is to add scale to the platform investment, thus benefiting from higher revenues and greater margins.

Strategics, on the other hand, have many more reasons to acquire a mid-market tech company, such as to speed up product development and distribution in order to keep up with competitors, or to acquire a technology or capability in order to build adjacent revenue streams.

As strategics are not motivated so much by acquiring scale, they dominate in the lower-middle part of the deal market where the financial investors are less likely to fish, as can be seen in the graph below from Pitchbook’s 2Q 2018 M&A report, where the 1H2018 median deal size for corporate acquisitions is $33.2 million.  Interestingly, the median deal size for corporate acquisitions has increased by 56% between 2016 and 1H 2018  (exceeding growth rates of platform and add-on median deal sizes).

Even in cases where mid-sized tech companies could have been suitable for financial investors as standalone targets, at the right price, and there is strategic investor interest, the financial investor will invariably lose out.

If you are looking at expansion and not an exit, then you would want to carefully consider the implications of a strategic investor versus a financial investor. The strategic and cultural fit for your company will be critical, and the strategic may want an option to acquire the rest of your company, providing you with a built-in exit but also fixing the exit price based on a formula (hence also potentially limiting any further upside on exit).

But if you are looking to maximize your exit, you best start with strategic investors – ensuring that you have an effective process of identifying and approaching targets with clear synergies, and using a transaction advisor that can add this kind of strategic value.