I’m starting a new business and have decided to build it from the start to be attractive to a strategic acquirer. My most important operating metrics will be Net Promoter Score, cost per account acquired and number of users, and my financial statement of choice will be a cash flow statement, not my P&L.

If I get it wrong, I’ll most likely walk away with nothing.

One of the most important decisions we all need to make is whether to position our business for a financial acquisition or a strategic one. It’s a high-stakes call that can end in disaster.

The safe route

The safer – but potentially less rewarding – route is to build your business for a financial acquisition. Financial buyers will base their offer on all of the core operating metrics taught in grade nine economics: How much profit do you make? How fast are you growing? How much recurring revenue do you have? How dependent is your business on you? The basics.

Swinging for the fences

A strategic acquirer will look past your financial metrics and dream about what your business could be worth in their hands. They’ll model the impact on their business if a small percentage of their customers buy your product – or if your customers buy their product. They might see your little business as a Trojan horse that will allow them to enter a brand-new world of buyers. That’s why, for example, Herman Miller announced plans to buy Hong Kong-based POSH Office Systems. It bought the company not for its $50 million in revenue but for POSH’s relationships with Chinese furniture dealers and the corresponding billion-dollar opportunity of selling office furniture to Chinese companies.

Because strategic acquirers have much more to gain, they also pay a higher price. Nowhere was that more evident than Microsoft’s recent acquisition of money-losing Skype for $8.5 billion. My guess is that Ballmer wants to convince more Windows users to upgrade to a new version (half are still running XP) – and a slick Skype integration could be the killer app. If Skype was valued by a financial buyer, it’d be worthless. But if Microsoft can use Skype to get a good chunk of a billion Windows users to upgrade, it might be well worth $8.5 billion to Microsoft shareholders.

The curse of the high school dropout

A strategic acquisition sounds great, right? So why wouldn’t everyone prepare their business to be attractive to a strategic?

For the same reason most right-thinking people don’t buy lottery tickets. If you pour all of your money into building a company for a strategic acquisition, you’re playing high-stakes poker. If it works, you get rich. If it doesn’t – and you end up with an unprofitable company – your business might just be worthless in the eyes of a financial buyer (fives times zero is still zero).

It’s like the promising high school athlete who forgoes education to focus on making the big leagues. If he is more talented and determined than a million other kids with the same dream, he is set for life. If he misses, he will probably end up pumping gas.

So why can’t you position yourself for both a strategic and a financial?

Well, you can, but you’ll probably end up with a business that is sucking and blowing at the same time. Just like Newton taught us, every action is accompanied by a reaction of equal magnitude but in the opposite direction.

When you’re optimizing for a financial, you’re not optimizing for a strategic and vice versa. For example, the company positioning itself for a strategic acquirer will pour all of its cash into product development. If the same company was positioning for a financial exit, it would limit its R&D spending to the bare minimum to protect its market position and maximize its EBITDA.

If POSH had been looking for a financial exit, it might have focused on directly serving a small number of very profitable Hong Kong-based investment banks instead of undertaking the cumbersome job of building a mainland dealer network that an acquirer like Herman Miller could leverage to enter China.

How to decide

Imagine who would want to buy your business and try to quantify the impact acquiring you would have on their business. If the financial upside for an acquirer is substantial (1,000% + return on their investment in the near term), then perhaps it makes sense to roll the dice and build for a strategic acquirer, assuming your lifestyle needs do not require you to draw much cash out of your business while you build it.

If, in your most sober analysis, a buyer’s upside will be more modest (less than 100% in the near term), it may be better to hedge your bets and build a good business with real profits any financial buyer would love to acquire. A profitable business will still be attractive to a strategic, but a financial will rarely be interested in an unprofitable business.

One final note on the subject of strategic acquisitions: I still have three spots left for The Sellability Workshop. I’m not planning to repeat it, so please fill out the application here if you want to join us.