Ever wonder why an industry giant swallows a minor player? Built to Sell author John Warrillow offers up some explanations.
Over the past year, Google has bought a company every two weeks, doubling its stated goal of 12 acquisitions a year and tripling its deal flow over that of the previous 12 months. In each case, these acquisitions have been 'strategic' rather than 'financial.' In fact, many large companies are looking to acquisitions as a means of supplementing their weak organic growth.
As a business owner, arguably your most attractive exit option is a strategic sale of your business to a larger company. Typically, strategic buyers are willing to pay more for your business than financial buyers (e.g., private equity firms) because they have strategic assets that can increase the value of both your company and theirs. Plus, strategic buyers have deeper pockets than your management team or next of kin, which make them more generous acquirers than your managers or kids.
Here are four reasons big companies buy little ones:
1. To sell your product to their customers
First Research creates cheat sheets for salespeople who want to sound smart when they call on a new customer in an industry they are unfamiliar with. Dun & Bradstreet has hundreds of thousands of customers buying sales leads from its Hoovers division. Seeing an opportunity to cross-sell, D&B was willing to pay $22.5 million to Bobby Martin and his partners so it could sell First Research industry profiles to Hoovers' customers. If only a fraction of Hoovers' customers bite, the deal will pay off for D&B.
2. To leverage your technology to make one of their products better
Google paid $25 million for DocVerse because it had built a better way for users to share documents. By swallowing DocVerse, Google is accelerating the adoption of its GoogleDocs platform.
3. To get a hold of your smartest employees
In the hit TV series Mad Men, Sterling Cooper got acquired because of the creative genius of Donald Draper. While the players are fictional in this case, big ad agencies and other businesses often buy smaller ones for the people.
4. To acquire a new place to sell their stuff
Bell Canada bought the Source last year to add 756 new stores to sell retail consumers phones, TVs and Internet access.
When I sold my last business, I was in discussions with three strategic acquirers, most of whom were at the table because they could see how our product could be sold to their customers.
If you want to sell your business to a big company, the trick is to explain to an acquirer how the combination of the two companies is worth more than the individual companies on their own.