EXIT STRATEGIES: Building relationships

It is much easier to set up a deal where existing relationships exist, especially if you have taken the trouble to meet the key players. Within most sectors, the number of key executives is quite small and they can often be met at seminars or conferences. This applies even to competitor’s executives. Also, in most industries there are people who have worked for several companies, thus the network is often well connected across companies.

In building your network you are not selling your company, you are simply getting to know people who might help you when it comes to getting the deal done. It may be that, when you are ready, there are people who will help you identify the best targets and help with introductions.

You can often position your company well in advance of making an approach or being approached. You can use your time at conferences positioning your firm in the market. Often competitors and other industry providers will be in the audience. You are simply letting people know what you do well. Take your core strengths and produce an interesting case study around it. This can then be presented to industry participants in the trade press or at a conference.

You should get to know the trade journalists and the market analysts in your sector or from the sector in which you expect the buyer to come. Getting publicity in the trade press may help open the door when you want to meet executives from potential buyers.

Take advantage of industry functions in your own country and in the major markets to meet with M&A Managers and your equivalent in the potential buyer’s business. You might even use the situation to discuss the future sale of your company and start building the connections for more detailed discussions. You might invite the most likely prospects to visit your firm to meet your management team. Providing there is no time pressure, this is a good way to build trust and present a story about how any synergy might work.

More formal relationships can also be useful in building bridges. There are a variety of ways in which formal relationships can be set up. These could include:

Management and/or shareholder roles:

• Member of a Board of Advisors
• Member of the Board of Directors
• Minority shareholder
• Venture capital provider

Formal trading relationships:

• Distributor
• Alliance partner
• Joint venture partner
• Customer
• Supplier

Formal relationships have a high conversion rate to acquisition. It is a ‘try before you buy’ transaction. The buyer has more of an inside view of products and management and has a better understanding of the fit of the two businesses and of the potential benefit of the acquisition.

Example:

April 30, 1997

Charlotte-based Metaysys Inc., a developer of transportation management software, and Costa Mesa, Calif.-based OPTUM Software, a provider of warehouse management systems software, have formed a strategic alliance. The partnership will coordinate implementation, use and support of the Metasys Enterprise Transportation Management and OPTUM Software’s MOVE WMS solutions.

Source: https://www.bizjournals.com/charlotte/stories/1997/04/28/daily9.html Accessed February 18, 2006

August 3, 1998

White Plains, N.Y.-based Optum Software and Charlotte-based Metasys Inc. have completed their merger. The companies announced their execution of a definitive merger agreement on March 31. Optum, Inc. provides the first supply chain execution software suite for manufacturers, distributors, retailers and third party logistics providers.

Source: https://triad.bizjournals.com/site_map/charlotte_sitemap_19.html Accessed February 18, 2006

What the firm has to avoid, however, is creating a situation where there is only one potential buyer or where a sale can be blocked or hindered due to an existing relationship. At the same time, a formal relationship is often quite easy to convert into a sale and so the firm does not have the stress of looking for a buyer. If the benefits to the buyer are sufficient, then a premium can still be achieved in passing control to the new owner.

Some formal relationships can be set up with a acquisition in mind. The formula for the deal can be worked out in advance so that the negotiation takes place before the formal trading relationship is entered into rather than be at the whim of the buyer later. The relationship can also be entered into with an option to terminate if there is a change of ownership. Alternatively, the firm could build in an option to buy out the trading partner in order to seek out a buyer. The strategy here is to have thought through the implications of a sale to both the trading partner and to a non-trading partner before entering into the initial relationship.

Example: (Author’s italics)

Agere Systems announced Monday the acquisition of an Irish semiconductor- maker that designs broadband network chips that are 10 times faster than current technology. The move is Agere’s first expansion after two years of contraction and plant closures, including the end of manufacturing in the Lehigh Valley.

The Dublin company is a startup venture founded in 1996 that began as a provider of engineering services. It has collaborated with Agere for the last year on developing gigabit Ethernet chips used in high-speed broadband networks. Agere produces chips for slower speed Ethernet connections.

Source: https://www.mcall.com/business/ accessed September 7, 2003

Example: (Author’s italics)

Thursday September 4, 9:22 am ET , 2003

ATLANTA (Dow Jones) – Chinadotcom Corp.’s CDC Software unit signed a definitive agreement to acquire Ross Systems Inc. (NasdaqNM:ROSS – NEWS) for $5 in cash and $14 worth of chinadotcom common shares.

In addition, CDC Software has been a master distributor of Ross Systems’ enterprise business solution, iRenaissance suite, in the Greater China region.

Source: https://www.rosssystems.com/ Accessed September 6, 2003

Example: (Author’s italics)

ATLANTA – Home Depot said Friday it has agreed to buy IPUSA, a national roofing installation company that has served as a contractor to Home Depot for the past six years.

Privately held IPUSA, which is comprised of Tampa-based Installed Products USA and Installed Products of California, is one of the country’s largest installers of residential replacement roofing.

The transaction is expected to close within 30 days. Terms of the acquisition were not disclosed.

Home Depot, the largest retailer of roofing materials, said the acquisition will provide it with a stronger platform for the company’s expansion into roofing installation and other installation services. Home Depot is working to increase its share of the $32 billion installation services market.

Source: https://www.dailybulletin.com/Stories/ Accessed September 7, 2003

When the owners need to sell, when they get an attractive offer or when they wish to sell, these prior relationships will help ensure the right potential buyers are brought into the sales process.

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.