How to Position Your Business for a Strategic Acquisition
In the past year, I’ve had multiple competitors approach me to acquire one of the businesses that I own.
Being approached by competitors — or anyone for that matter — is always flattering, but, more importantly, it opens a door for many business owners that they have not considered in the past: selling their business.
If you’ve ever thought about selling your business, you likely thought about selling it to a strategic buyer — a larger company in your industry, a competitor or a business in a neighboring industry that could benefit from something you’ve built.
While most acquisitions that occur are not strategic exits — most businesses are sold to financial buyers (i.e. buyers who like the financials of the business but do not necessarily gain a strategic advantage by acquiring that business) — there can be significant benefits for you if you are able to find a strategic buyer:
1. More money. Strategic buyers often see stronger returns on their investment which allows them to pay more for your business. For example, an ecommerce business that has a large warehouse may be able to acquire a smaller, but similar ecommerce business without adding new warehouse and order fulfillment costs.
2. Easier transitions. Because the buyers are already familiar with your industry, the transitions are often easier to manage — but not always.
3. Strategic buyers can often do more with your business. Because strategic buyers know your industry, they can often build your business rapidly after the sale. If you are interested in seeing your business grow, strategic sales can be a great way to go.
But for all the benefits of strategic acquisitions, most small business owners who decide to sell their business will end up looking for a financial buyer. Why, because strategic exits are often more difficult to pull off.
While many business owners think that a strategic exit is the most natural or the easiest type of acquisition to complete, the truth is that it often has the lowest chance of success. Most acquisitions occur to financial buyers — acquiring companies who may not have specific industry knowledge, expertise or advantage when buying your business, but like the potential financial return on investment your business provides.
There are several reasons for this. First, if you are trying to sell your business to someone within your industry or marketplace, you often lack leverage. The reason for this is simple. Rather than having potential buyers line up to acquire your business, you are approaching potential acquirers with your business opportunity. Unless you can generate interest from multiple suitors, this approach tells potential acquirers that they have more leverage when dictating the terms of a potential deal. They know you are looking to sell, and they know that you prefer to sell to them.
Second, strategic exits often fail to materialize simply due to bad timing. Unless the company you are approaching to make a deal is a massive enterprise, most acquirers need to plan out their resources — both in capital and work requirements — in order to successfully complete a merger or acquisition. When you approach a potential strategic acquirer, even if there may be a good fit between your company and theirs, the timing might simply not be right.
Finally, the pool of strategic acquirers is usually quite small. How many companies would benefit from a strategic acquisition of your firm? Two? Five? Fifteen? The fact is, when selling any company, having a larger pool of buyers gives you better leverage and better chances of success.
Tips for planning and executing a strategic exit.
Despite the obstacles above, planning a strategic exit is possible. This very publication is filled with tips on how to get your company acquired. However, too few business owners put any thought into what is actually needed in order to pull off a successful strategic exit. With that in mind, here are a few practical tips to prepare for a potential and hopeful strategic exit:
1. Strategic exits usually start early. A strategic acquisition rarely happens as the result of picking up the phone, calling a competitor and asking if they want to buy your company. Sure, there are the rare cases where this approach succeeds, but most strategic exits happen more organically. The two companies know each other, have known each other for some time, and see that the acquisition would be good for both companies.
2. Build your strengths to address other business’s weaknesses. If a wholesaler decides to enter into the direct to consumer market, they often do so by acquiring one of their clients. This is because they recognize that their weakness (direct to consumer) is their client’s strength. If you are hoping to be acquired by a larger competitor, get to know their relative weaknesses, and build your company to be strong in those areas. This isn’t just good acquisition advice, this will help you differentiate your business in the marketplace.
3. Have more than one potential suitor in mind. Acquisitions work best for the selling company when they have the option to decline any particular offer. If you have multiple companies that could acquire your business, you not only increase your chances of a successful acquisition, you also set yourself up for potentially having leverage in a negotiation.
4. Let potential acquirers know in advance that your business might be acquirable. In most strategic acquisitions that I’ve seen successfully completed, the company that is acquired had a previous relationship with the acquiring company and informed them that selling might be an option they would explore in the future. By letting your intentions be known early, you give potential acquirers the time and the ability to consider acquiring your business as a part of their strategic plans.
5. Be patient. The strongest leverage any business owner has in an acquisition is the ability to walk away from the negotiation table. If the terms you are receiving aren’t right, walk away.
6. Finally, consider a non-strategic acquisition. When I started Quiet Light Brokerage, my very first client owned a business in an industry that had aggressive strategic acquisitions occurring on a weekly basis. In the clients industry, valuations were mostly based on a simple monthly revenue valuation approach. Businesses in this vertical would sell for anywhere between 10-18 months worth of gross revenue. For my client, this translated into a valuation of roughly $500,000 for his business. While we could have sold his business for that price and had a closed deal in just a few weeks, we decided to look for a financial buyer. Three months later, he closed on the sale of his business for $625,000 to a buyer who was not a part of his industry, but loved the opportunity he saw.
The fact is, while strategic acquisitions often result in higher — sometimes significantly higher — valuations, this isn’t always the case. The fact is, more deals are completed in a financial acquisition space simply due to the fact that there are so many more financial buyers looking for good investments.