Let’s say your company, LittleLeather, makes and sells high-end leather smartphone cases. You have some excellent suppliers, a nifty little patented closure, and a growing customer base. You sell worldwide through your website, and you’re established in some regional retailers in the northeast.
Then CaseCo comes knocking. They’re one of the bigger players in the industry, with a national footprint and strong sales of plastic and silicone cases . . . and they’ve just realized that they’re the only industry leader without a luxury product line. They approach you, saying they want to buy LittleLeather. You hadn’t been thinking about selling, but it’s an intriguing notion. And it's exactly the situation one of my clients found themselves in, not too long ago.
In the right circumstances, selling to a strategic acquirer can be significantly more successful and profitable than partnering with a financial acquirer. Financial acquirers focus on the numbers because they have to justify their decisions to a group of investors. They evaluate companies based on spreadsheets, earnings reports, the state of the industry, and so on. If you’re worth $20 million to Private Equity Group A, you’re going to be worth roughly the same to Private Equity Group B.
By contrast, strategic acquirers are able to take a much more personal approach. They don’t just look at what a smaller company is worth in the marketplace, but also at the synergies between themselves and the potential seller.
In the example of CaseCo and LittleLeather, it might look like this.
LittleLeather, the smaller regional player, could get:
The cache of branding its products under the CaseCo name
A big group of established (and hopefully satisfied and loyal) CaseCo customers
Access to CaseCo’s national distribution channels
A greatly expanded sales force, marketing team, and research department
CaseCo, the national player without a luxury product, could get:
A new line of leather cases to sell, which will round out their product offerings
Very little risk of failure (after all, LittleLeather is profitable, so there is demand for the product)
Immediate ROI, because they don’t have to do any of the up-front research and design, or spend time setting up manufacturing
The intellectual property and proprietary technology of LittleLeather’s patented closure
LittleLeather’s sales team, which is already expert at selling that product
Because of synergies like these, strategics are often in a position to pay more, sometimes significantly above the usual industry multiples that financial acquirers focus on. A strategic acquirer has expert knowledge of the industry and the seller’s unique market position, so they know how to quickly and effectively integrate the new company into their existing infrastructure.
How will this affect you personally? In the majority of these transactions, a strategic acquirer wants the CEO of the selling company to stick around for a while, usually 6 or 9 months, to help with the transition. Alternatively, you could keep running your company - but as a division of the larger buyer, rather than flying solo (and many entrepreneurs have a hard time reporting to someone else). In some situations, the buyer is so comfortable with the industry that they’re happy to let you move on right away.
Is it worth it? Well, that’s up to you. But if a strategic acquirer approaches you, it’s probably worthwhile to at least look into it. Under the right circumstances, a strategic acquisition can be a powerful partnership that enriches both parties.
DAVID LONSDALE built and sold three venture-funded companies before becoming president and co-owner of Allegiance Capital in 2005, which provides M&A financial services to middle market business owners. @MiddleMktMandA