When it comes to exit strategy and preparing your business for a sale, whether a year from now or years down the road, you will generally have two options for an external sale – the financial buyer or the strategic buyer. These can also be understood as selling your business the easy way, or the hard way.
While going the easy route certainly has its appeal – namely, avoiding the headache of a drawn-out sales process – going the hard route may indeed be more beneficial in the long run. To learn why, you must first understand the two types of business buyers.
The Financial Buyer
Financial buyers are interested in buying companies for fairly straightforward, easy-to-understand reasons. They are buying the rights to your future profit stream, so the more profitable your business is expected to be, the more your company will be worth to them. Strategies that are key to driving up the value of your business in the eyes of this buyer include taking out as much risk as possible, creating recurring revenue, reducing reliance on one or two big customers, cultivating a team of leaders, and so forth. These buyers see what they’re getting, and try to maximize the business’s existing structure.
Selling your business to a financial buyer is taking the easy way in this situation. These buyers want your business as-is, and they want to run that business in a way that maximizes future profitability. Simple enough.
The Strategic Buyer
The alternative is to sell to a strategic buyer. Strategic buyers constitute going the hard way when selling a business – but the diligence of taking the hard way is usually well worth it. That’s because strategic buyers have very different concerns and goals than financial buyers.
When determining an exit strategy, Strategic buyers will care less about your future profit stream and more about what your business is worth in their hands, typically calculating how much more of their product they can sell by owning your business. Strategic buyers are usually big companies, so the value of being able to sell more of their product or service because they own you can be substantial. This often leads strategic buyers to pay more for your business than a financial buyer ever would.
For an example, take Nick Kellet’s Next Action Technologies. Kellet’s company created a software application that takes a set of numbers and visually expresses them in a Venn diagram. Next Action Technologies was generating approximately $1.5 million in revenue when they received their first acquisition offer; Kellet’s first valuation was for $1 million, a little less than revenue, which is a pretty typical from a financial buyer.
However, Kellet eschewed conventional wisdom and did not take the easy way. He inferred that the business could be worth more to a strategic buyer, so he searched for a company that could profit by embedding his Venn diagram software into their product.
Eventually, Kellet found Business Objects, a business intelligence software company looking to express their data more visually. Business Objects could see how owning Next Action Technologies would enable them to sell a whole lot more of their software, and they went on to acquire Kellet’s business for $8 million, more than five times revenue – an astronomical multiple.
His gamble – taking the more difficult route instead of a certainty – had worked.
Preparing Your Business for Both Buyers
So, should you completely focus on making your business attractive to a strategic buyer instead of a financial buyer? Unfortunately, it’s not nearly that simple.
As far as an exit strategy goes, strategic acquisitions are very rare – much less rare than financial acquisitions. This is due in a large part to the fact that most industries have only a handful of strategic acquirers, so your buyer pool is small and subject to a number of variables out of your control; the economy, interest rates, the competitive landscape and many other uncontrollable circumstances.
Think of it this way: imagine your child is a promising young athlete who’s intent on going pro. You know that becoming a professional athlete is a long shot, fraught with unknown hurdles, such as injuries, poor coaching, or just not having what it takes to compete at the highest levels. Do you squash her dream? No, but you do make sure she also gets her education, so if the athletics don’t work out, she will have a quality back-up plan.
When developing your exit strategy, the same is true of positioning your company for an exit. Sure, you may want to sell your business to a strategic buyer in a spectacular exit, but a financial acquisition is much more likely, and financial buyers are looking for companies that have done their homework – companies that have worked to become reliable cash machines.
On the other hand, however, in a good exit strategy it’s important for you to be able to accurately gauge the value of your company, so that you don’t settle for a financial acquisition when a strategic acquisition may be possible, and much more rewarding. Sometimes, the hard way is the best way; regardless of how tempting it might be to sell your company at an acceptable price point, you’re only cheating yourself if you don’t keep your options open for a more rewarding sale. This is why you need to drive the value of your business up as much as possible, and wait for the offers to roll in.
To determine the value of your business before preparing for a sale, we invite you to take our Value Builder Assessment today!