BLOG STARTUPS, VENTURE AND THE TECH BUSINESS

April 14 2010
by Todd Hixon

Three Ways To Sell A Business

Frequently entrepreneurs and investors come to the point where they want or need to find an M&A exit.  Is the time right?  What should they expect?

Here’s a framework that I hope is helpful.  Buyers pay for three things:  strategic opportunity, growth, and earnings/cash flow.  Which of these you have to offer will influence who’s interested and what they will pay.  Market conditions and selling tactics matter a lot, too.

You can sell strategic opportunity only if the buyer has strong conviction that there is a big opportunity to be captured, and your company is a unique asset to capture it.  Most often this is an early lead and/or a unique technology position in a strategically important market that is exploding.  Under these conditions you can get a big price for a company that is early in the growth cycle and still running large losses.  The recent acquisitions of AdMob by Google and Quattro by Apple are examples:  these companies provide an early lead in the mobile ad market, which Google and Apple believe to be huge, lucrative, and strategic.

But, “strategic opportunity” sales are rare.  A major market wave generates one or two at most.  It’s hard to predict when the stars will line up.  So it’s usually not good to bet that you can pull this off; it’s better to build for the longer term and seize this opportunity if you can.

Selling growth is what we do most often.  Many larger companies expect to create a large part of their growth by buying products and businesses they can scale and optimize; Cisco is famous for this.  After recession periods, during which big companies cut back on growth investments, demand for growth acquisitions is often strong.

Growth sales have a profile:  the business is big enough to matter (~$20 million+), growing well (30%+/year), near profitability or better, and a good fit for the acquirer.  Break-even is important:  public companies are highly earnings conscious and do not want to take on losses.  If you are break-even, however, they will calculate that they can cut costs and expand volume and quickly move to profit.

If you have significant, proven EBITDA and, even better, growth, the door opens for financial buyers.  In practice, it seems that financial acquisitions of successful venture-backed companies are infrequent, perhaps because good companies are bought by growth buyers before they reach point the point where financial buyers develop interest.

Market conditions are a big overlay to the above.  Buyers offer more when their own stock prices, earnings, and cash positions are strong.  They offer more if your market is “hot” (strong investor enthusiasm) and there are few acquisition opportunities in your space. And, two serious bidders is far more than twice as good as one.

The value growth curve for a business is not smooth:  it has local peaks and plateaus.  One peak occurs when strategic value is proven.  Usually the most pronounced peak comes with scale and profitability:  when growth buyers get interested.  Profitability is a huge milestone for companies seeking an exit.

COMMENTS

April 14 2010
by NewAtlanticVentures

From the NAV Blog: Three Ways To Sell A Business http://bit.ly/93XyeW

April 16 2010
by Thanasis Delistathis

RT @navfund: Three Ways To Sell A Business http://bit.ly/d0Luab

April 16 2010
by Mike Cichowski

Good post by @navfund. Strategic is ideal, but rare: Three Ways To Sell A Business http://bit.ly/d0Luab.

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