Everyone looking to sell their business hopes for a successful, strategic acquisition.
But whether you’re aiming to sell your business now, or planning for a future exit, it’s important to enter this process with the buyer in mind.
Your exit strategy will revolve around what type of buyer you’re targeting. By understanding the differing motivations of each type of buyer - as well as your own - you can streamline your approach by prioritising those buyers that best fit your business’ needs.
There are two broad categories of investors and acquirers.
Financial VS Strategic Buyer
Put simply, financial buyers are paying for exactly what your business has to offer today. There is an expectation that the current earnings of the business will continue into the future, which is why most people will pay a multiple of historical earnings. While all signs might point to future growth, a financial buyer has no interest in paying for anything speculative.
A strategic business buyer, on the other hand, will be able to leverage some element of your business that enables them to make more money with your business than you can, or potentially any other acquirers. They are usually larger companies and may include competitors, suppliers or clients - that will benefit from what you’ve built by leveraging it into their own business model. Their main objective is to acquire a business whose products or services align nicely within their own business model.
Not only does this take out some of the speculation around future growth, but the point of leverage and additional returns allow them to pay more for the business and still obtain a sufficient return. BUT...it is important to note that just because they can afford to pay more, it does not mean that they will simply volunteer this. But where this strategic acquirer is in a competitive position with other buyers, they will usually have more flexibility on the price of your business than the other parties at the table.
What Drives A Strategic Acquisition
While highly coveted, most business exits are not strategic ones, they’re financial. Yet the benefits of finding the right strategic buyer can be invaluable.
- Potentially Higher Price: A strategic buyer goes into the sales process knowing they’ll come out with a valuable business in the industry they’re operating in. This synergy between the two companies means they’re usually willing to pay more than a financial acquirer. The higher the perceived ROI, the harder you can push.
- Closing can be Quicker and Easier: Since this investor is already operating in this space, they’ll already have a solid understanding of your sector and potentially your business. This helps expedite the sales process as there will be less time spent catching the investor up on the ins and out of the business model. Note, this does not mean the investor won’t scrutinise your financials, more so it means they already know exactly what to look for to determine whether it will be a worthwhile acquisition.
- Betterment of Your Business: There’s a reason a strategic acquirer wants your business. Whether it be to venture into new product lines, takeover distribution channels, or break into new locations, they can often scale up your business rapidly. This has the added benefit of deepening relationships with your current client base, stakeholders and other key players.
Since strategic buyers are driven by separate goals other than just business financials, you can tap into their motivations. If you can understand what’s propelling them forward, you can gear your business exit strategy towards a strategic acquisition.
How to Get Acquired by a Bigger Company
While lucrative, strategic acquisitions are not as common as you would think. Besides finding a company with strategic alignment, you are also contending with the timing of the respective parties and whether they are in a position to entertain a deal when you are looking to sell.
The first question to ask is, have you thought about who would be a good fit for a merger? Then ask the question of what problem could you solve for them if they were to acquire your business. Once you feel you have that defined, you can seek to engage.
So how do you catch the eye of a strategic buyer? We can look to entrepreneur, Charles Jolley, for inspiration.
Facebook's Acquisition of Ozlo
Charles Jolley created a digital assistant company called Ozlo. Think, Apple has Siri, Amazon has Alexa and Google has its suite of Google Home products. Jolley believed he had built better technology than anyone else on the market, and was determined to get a big company to distribute his technology. But instead of outright asking to be acquired, he took a more strategic approach, changing his language to ‘partner with’ rather than ‘acquire’ Ozlo.
When Jolley met with Facebook, the conversation quickly switched direction and Facebook ended up in a bidding war for Ozlo among some of Jolley’s other potential partners. In the end, the social media giant made him an offer he couldn’t refuse. What we can learn from this is even if you’re not planning to sell in the immediate future, it’s important to know where you sit in the market, who your competition is, and where the opportunities lie for a strategic acquisition. Then you watch and wait and continue to build value by framing your decisions based on the type of exit you seek.
Here’s another example of how shaking up your perspective can make all the difference in finding the right buyer.
How to develop a business acquisition strategy
Selling your business to a strategic buyer is possible with the right preparation. Here are 6 tips to get your business ready for a strategic acquisition.
Consider the Jolley example. He knew going in where his shortfalls were, what his future goal was, and who he thought could deliver on that goal. A strategic acquisition is… strategic. There needs to be a level of foresight to be able to successfully pull one off. While strategic acquisitions occasionally happen by chance, they usually involve some degree of preparation.
Carve Out Your Niche
This is indicative of how well your plan is. Take the time to scrutinise your business. What are its strengths? More importantly, what are your competitor’s weaknesses? If you can cement yourself in a unique corner of the market, you’ll become more profitable in your own right, but more valuable to those potential acquirers. Remember, many strategic acquisitions are the result of wholesalers switching to a B2C model. This is easily done by buying out one of their clients. So if you build a strong, direct to consumer business model, this could work as strong leverage during acquisition talks.
Clean It Up
Even if you’ve decidedly carved your name in the market, it’s no use shopping out your business unless everything is in good working order. Are your books accurate and up-to-date? Have you revisited your processes lately? Make sure all of your due diligence is complete before you speak to a potential buyer. This helps to mitigate any concern an investor may have. Do this by building (and maintaining) a strong team, be metrics-driven and show your growth through both leading and lagging indicators.
Identify Your Targeted Buyers
You know your strengths, your dirty laundry has been aired, dry cleaned and neatly folded away. Now it’s time to find a buyer. The trick is to find someone who is a good fit culturally, as well as from a business perspective. It’s best to start by reaching out to your suppliers or consultants early on in your strategy and mentioning the possibility of an exit. If they’re interested, this gives them time to gather their resources and incorporate it into their road map.
Play the Field
Your acquisition plan shouldn’t rest solely on the backs of one buyer. For one thing, you’re putting all of your eggs in one basket. For another, you’re losing the valuable opportunity to create healthy competitive tension. This may create a favourable situation for you as the seller as it establishes an environment that typically results in higher valuations and improved transaction terms, while mitigating transaction risk.
Don’t be Afraid to Wait
If you wanted a quick exit, you would have sought out a financial buyer. Your biggest trump card is the ability to walk away if the deal isn’t up to your standards. For more examples of why deals fall apart, read this article.
Just as a strategic buyer is looking to acquire your business for long term gain, you too should be thinking about the future. Building a business is hard, but with careful planning, meticulous bookkeeping, close scrutiny over the evolving market landscape, and with a little bit of luck, you could walk away from the negotiation table with a strategic acquisition.
To learn more about building a valuable business feel free to get in touch.
At Exit Advisory Group we help entrepreneurs maximise company value and exit at the top of their game.
We do this by giving business owners the tools and strategies to design more profitable, efficient and enjoyable businesses to own - that are also less dependent on them. When they choose to exit, they are in the best position to unlock the wealth in their business and be rewarded for their hard work.
If you liked this article we'd love you to share it!