Oftentimes, business owners make the mistake of thinking that a strategic acquirer is going to want to buy their business so that they could use their physical footprints and sell more of the companies that have acquired products. They will go through this thought process and say, "Well, we sell widgets and if ACME Inc. bought us, man, they could sell lots of our widgets." That’s actually not usually the reasons strategics buy companies. The most common reasons strategics buy companies is to find a way to sell more of their stuff.
So the question that a business owner needs to ask themselves is: "Who is out in the marketplace that, by bolting on our company, could sell more of their stuff?" A good example will be Microsoft's acquisition of Skype. They weren’t trying to sell more Skype stuff. Microsoft bought Skype so that Microsoft could sell more Microsoft products. Again, a lot of business owners are so absorbed in selling their stuff, that they think an acquirer would buy them so that the acquirer could sell more of their stuff. It’s actually very much more common to see the inverse.
As another example, when Google bought Frommer’s, the travel guide business, they weren’t trying to sell more travel guides. Google was acquiring Frommer’s search juice and they paid $22 million for that privilege. If the owner of Frommer’s had thought about their goal as selling more travel guides, then Google would never have acquired them. It was all that built up years of search juice that Google was after.
When selling the business, a good investment banker does the math on the potenial value that a stategic buyer can get from selling their product through the acquired business. They don’t rely on the strategic buyer to do that the math. They will model it out and look at three scenarios; good, bad and excellent. They say to the buyer, "So under the 'good' scenario, you sell 10% more of your widgets Mr. Fortune 500 company. What’s that worth to you?" "Well it’s worth $6 billion in revenue." "Okay good. Would you spend $100 million for $6 billion? Most strategic buyers would. Under the 'great' scenario, you sell 20% more of your widgets which means that it’s $12 billion worth of revenue. Would you spend $200 million to get that?"
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Written by John Warrillow
John Warrillow is the founder of The Sellability Score and author of the book "Built to Sell: Creating a Business That Can Thrive Without You". Throughout his career, John has started and exited four companies and is a sought-after speaker and angel investor.
John's new book, The Automatic Customer: Creating a Subscription Business in Any Industry, is scheduled to be released in February 2015.Full Bio