EXIT STRATEGIES: Corporate buyers

Very few corporations buy firms for their revenue and balance sheet if there are no other synergies in the deal. They are typically looking at how they might generate a strategic benefit from the deal. Even a financial acquisition will typically involve some level of cost saving synergies.

However, most corporate acquisitions are made for strategic value. The strategic value will arise through the acquisition solving a problem or need which they have or presenting them with a compelling opportunity within their strategic objectives.

However, they will try to close the deal around conventional valuation models which focus on net assets, cash flows and profits. Only by understanding how the buyer could leverage the potential of your firm can you move them to a premium acquisition price.

The key to an acquisition premium is to discover how they would exploit the acquisition. This may happen if your firm is approached directly, but if you have to take the initiative, then you need to spend time with the potential buyer to establish whether there are synergies in the relationship. If time is on their side and not yours, the power in the negotiation is left with them. Only by having time and choice can you avoid a fire sale.

Many companies are prepared to discuss a potential acquisition, especially if they are not put under pressure. Scheduling a meeting with their M&A Director is certainly possible if you make it easy for them. Going to their office (especially if you have to make a considerable commitment to do so is impressive), meeting them at a trade show, seminar or conference are common techniques to get in front of the potential buyer. What do you want to find out?

• Are they interested in doing acquisitions?
• What areas are they interested in?
• Do they have any criteria they use to rate possible acquisitions?
• What characteristics rule out an acquisition?
• Do they have location, age, size, industry preferences?
• Are they looking in any specific area?
• What is their process – how do they go about the evaluation?
• What typical information are they seeking in the evaluation?
• What things would make you more attractive?
• What are they not interested in?
• Who should you stay in touch with?
• Can they give you some references to CEO’s or CFO’s of past acquisitions?

The Venture Capital industry has created a myth that success in an exit is about building an ‘A team’, creating revenue and profits and rapid growth.

While this may be appropriate for financial acquisitions, this usually does not apply to strategic acquisitions. Many acquisitions are made to acquire specific intellectual property (IP) or assets, specific key people or access to a strategic market or customer. Most often senior management is made redundant in the process (there goes the A team) and/or the customer base is abandoned as they are not beneficial to the new owner.

If you think of the acquisition from the buyer’s perspective, you can start to see where the fit is, but, more particularly, you can see what is not going to fit. What doesn’t fit becomes a problem in the acquisition. If the firm is being acquired to fix a problem, then your employees, customers and even products may be a liability going forward. If the acquisition is being done to acquire products which can be sold back into the buyer’s customer base alongside existing products and your customers are not targets for the rest of the product portfolio, you have customers they probably don’t want.

You may have spent years building up revenue through a network of distributors to find your best potential buyer only sells direct. You now have a problem of closing down the distribution network in order to get the deal done.

The key to the sale might be your IP or some key people. The buyer may be able to leverage that across a large existing customer base or to open new markets. Regrettably the rest of your company is a liability.

Many firms are wary of opening up their books and IP to a potential buyer, worried that their competitive advantage may be copied or their secrets stolen. While this is a reasonable concern, the advantage of time to market and cost to create is on the firm’s side. A corporation which is under threat may not be able to wait to build their own solution. A corporation faced with an opportunity may be prepared to pay a premium to access it early. Another approach is to use an independent auditor to verify product capabilities or simply refuse detailed access until there is solid evidence of intention.

What is the key message? Know what the potential buyer(s) want and what they don’t want. Only by spending the time meeting and talking with potential buyers will you find out which are the best fit and what you should do to present a compelling acquisition proposal.

Tom McKaskill is a successful global serial entrepreneur, educator and author who is a world acknowledged authority on exit strategies and the former Richard Pratt Professor of Entrepreneurship, Australian Graduate School of Entrepreneurship, Swinburne University of Technology, Melbourne, Australia. A series of free eBooks for entrepreneurs and angel and VC investors can be found at his site here.