Getting acquired for a huge price is the dream of virtually every start-up I see. So why are some companies acquired for eye-popping valuations while very similar ones never attract much interest? The difference often comes from smart exit planning.
One of the most important factors is getting on the radar of potential acquirers. “You would think that we have a market map with every company in our space and a priority list of the companies we would most like to acquire,” said the former head of business development for a highly acquisitive Fortune 500 technology company. “That couldn’t be further from the truth. We buy companies we know.”
Here are two recent examples from our portfolio. In February, eBay acquired WHI Solutions, a provider of software and digital catalog solutions for aftermarket auto parts distributors. Last month, 3M acquired CodeRyte Inc., which brings computer-assisted coding technology to healthcare providers.
The CEOs of both of these companies had sought out and developed strong strategic partnerships with their eventual acquirers. These relationships were in place about a year before the two smaller companies began their sale process. eBay and 3M were willing to pay the highest price, in part because they knew WHI and CodeRyte as well or better than the other bidders.
So, how should you plan for this potential event in your company’s lifecycle? Here are three tips:
- Long before you intend to sell your company – years ahead of time--think of every objection or issue that a potential acquirer might have. Is your customer concentration too high? What are the expansion opportunities, and how well proven are they? Do what you can to mitigate those concerns. Get input from people who have been through several acquisitions, on either side of the table.
- Identify strategic partnerships with larger companies that have made acquisitions in your market at attractive multiples. As you work together, you’ll sense if things are going well. If your partner values you, they’ll let you know that they may want to form a deeper relationship.
- Pick an investment banker and legal advisor well before you receive an offer for your company. This will put you in position to react quickly if you receive an unsolicited offer. Keep in mind that you’ll have weeks to respond, not months.
- When you do get an offer, analyze the benefits that your strategic partner will receive from the acquisition, both in terms of revenue growth and cost savings. You might know the potential benefits better than they do. Often you can get a strategic acquirer to pay for some or all of these benefits.
Follow these simple rules, and your great company could gain the interest it deserves.