How to Build a Company That Will Sell for Big Money
BY Minda Zetlin
Think high profits are the key to a high sales price? Think again. A number of factors could matter much more.
Think you don't need to have an exit strategy--you'll be running your company until you retire or die? "At some point, whether it's your kids or their kids, someone is going to want to sell the company," declares Ben Straughan, partner in the Emerging Companies & Venture Capital practice at Perkins Coie. "There really is no 'forever' in the company world."
Besides... even if you are going to keep your company, isn't it nice to know you've built something with intrinsic value that you can sell for a large sum if you ever want to or need to? "You may want to know that you have liquidity," Straughan says.
Or maybe you already know that you want to do this for a few years, then cash out and go on to something else. The point is this: How do you get the best price?
1. Turn a profit--maybe.
All things being equal, a company that's turning a profit is a more attractive acquisition than one that's losing money. But you might be surprised at how big a difference other factors can make. Your business could be highly profitable but not very sellable, or unprofitable but highly sellable. Read on to find out how.
2. Own great intellectual property.
Companies from Grand Central (which is now Google Voice) to Mint have been acquired not for their customer base but for their software. And it's not just software that makes a company valuable: Trademarks, copyrighted content such as text, images, or video, or designs can all make a difference.
So while there's little point in designing, say, a customer relationship system with Salesforce.com out there, if you can design a better system for doing something, you'll raise your purchase price. Same goes for content you create. The trick is this: The company must own the intellectual property. So try to get the copyright on anything created by employees. And make sure anything you yourself create is copyrighted or trademarked in the company's name, not yours.
3. Have lots of different (and happy) customers.
"Customer concentration" can be a problem when you want to sell, Straughan says. "You could have a hugely profitable customer, but if you only have one, you might be more profitable than another company but have less sales value."
Leaving aside the obvious problem that having one customer can make you very vulnerable, the more diverse your customer base, the more attractive your company is for purchase, especially if those customers love you. "Customer loyalty is a tremendous asset," Straughan says.
4. Be sticky.
Ever wonder why banks offer incentives if you set up a direct deposit? Because once you've got automatic payments set up, it's a big pain in the neck to switch. That pain is what makes your product or service "sticky"--and more valuable to acquire.
5. Have great talent.
If you have great employees with highly sought-after skills, your company may be attractive as an "acquihire"--a company that is bought in order to hire its employees. If you needed one, this can be a good reason to invest in hiring the best people you can find, paying for training in new skills, and creating an office and work environment where they will be happy and engaged.
Including yourself. After all, in almost any acquisition, the company's most valuable asset is you.