EXIT STRATEGIES: Finding strategic buyers

The ultimate strategic buyer is the one which can best utilise the underlying assets and capabilities of the firm. Once the assets and competencies are identified, the search starts for those corporations which can best leverage them.

An investigation of historical strategic sales will show that these businesses were not acquired for their inherent revenue and profits. It was an underlying asset or capability which the acquirer was seeking and they justified the premium on the purchase price by showing they could generate significant future value through the acquisition.

In many acquisition situations, the acquirer is consolidating a number of similar businesses with the aim to build cumulative capacity in terms of revenue.

The synergy in the consolidated business comes through economies of scale. In this situation, it is very difficult for a firm to achieve a premium on sale unless they are a key firm in the industry and their acquisition can convince others to join the consolidated entity. Alternatively, they may have some management processes which can take additional costs out of the combined entity. These are not strategic deals. Corporations undertaking consolidation strategies are unlikely strategic buyers.

In seeking out potential strategic buyers, you need to find corporations which can generate large new revenues or resolve serious threats through the acquisition. You should start your search for potential strategic buyers by developing a screening technique to whittle down the list of potential buyers.

In the end, you want about 5 – 8 corporations which meet all your selection criteria. If it is not possible to identify that many, then you want those which have the best available fit. I usually start with a wide net and use a series of tests to exclude candidates.

Start with a set of questions which will generate an initial population of corporations which have something in common with your firm.

• Who makes money when I make money?
• Who does not make money when I make money?
• Who can make more money than I can from my products?
• Who can remove a constraint on my business?
• Who has a problem I can fix?
• What threat can I reduce or eliminate?
• Who sells to the same customers I sell to?
• Who uses the same technology I use?
• Who needs my customer base?
• Who needs my technology or people?

Who makes money when I make money?

The most common acquisition path is to sell to a partner. Where the firm is jointly selling into a customer, each taking a part of the profit, the larger firm will often want to be in better control of the sales process and the account future. Also a supplier generally makes money when the firm makes a sale and may wish to integrate forward to control the channel and to scale the business. A distributor also makes money when they sell the firm’s products. They may wish to integrate backwards to scale the opportunity by increasing capacity, increasing R&D or providing greater coverage

Who does not make money when I make money?

If one firm wins a contract, it generally means another has lost it. Buying a competitor may provide multiple benefits to the acquirer. It may increase the customer base for existing products, reduce pressure on price, make the sales process more effective by eliminating a competitor and acquire some new product capabilities. The acquirer may wish to upgrade their products, integrate some of the products into theirs, cross sell new products to existing customers, acquire technology or R&D capability or acquire a customer base.

Who can make more money than I can from my products?

The selling firm should look far and wide to find a firm with the capacity to scale their products into larger markets. A buyer which can readily introduce the products into existing customers and/or existing distribution channels is an ideal target. A buyer which has the capacity to rapidly expand the products into a sector they are not currently in, but have the muscle to expand into that sector, is also a good target.