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.

You’ll get the most for your business if you sell it to a “strategic acquirer”.  A strategic may think it can sell your product to its customers, thereby tripling the size of your business in a few months. Or maybe it sees your company as the perfect complement to one of its existing business units. Or it wants to enter the city where you dominate, and acquiring you is easier than battling you for every new customer. Or perhaps you’re snapping up its customers, and rather than compete, it figures it’ll buy you.  Microsoft made a strategic acquisition when it paid $8.5 billion for Skype even though the free calling service was losing money.

16 people climb inside the black box of selling to a strategic

If you’d like to position your company to be acquired by a strategic, I’m hosting a 16-person workshop on September 28 and 29 at the Four Seasons Hotel in Chicago.

The Sellability Workshop is an intensive, two-day program designed for business owners running profitable companies with between $500,000 and $7 million in annual revenue who want to make their business attractive to a strategic acquirer. I’m accepting just 16 people into this workshop.

Selling your business to a strategic acquirer is hard work, and only a small fraction of business owners who want to be acquired ever get an offer from a big fish. But just because something is hard, doesn’t mean you shouldn’t try. Like climbing Everest, selling your business represents the top rung of your entrepreneurial adventure. There is no magic formula or recipe book on how to do it. But, based on my experience, there are some things you can do to improve your odds.

If you’re one of the 16, you’ll learn how to:

• Prepare your business to be an attractive acquisition candidate:
  • Create a recurring/subscription revenue model (how to implement, mistakes to avoid)
  • Increase your valuation multiple
  • Create a positive cash flow model
  • “Productize” a service
  • Tell your employees you’re selling and get them to help you in the process
• Negotiate a deal to sell your business:
  • Reduce or eliminate an earn-out
  • Get multiple, competitive offers for your business
  • Handle management presentations to potential buyers
  • Evaluate a letter of intent (things to look for, mistakes to avoid)
  • Shorten the due diligence period
  • Increase the likelihood that your offer will survive from letter of intent to closing day

Being part of a small group is a luxury. You’ll have the opportunity to address your specific situation, questions and challenges. I’ll lead the conversation in a workshop format, but there will be lots of Q&A, time to reflect on your own business, and plan your takeaways from the session.

Confidentiality

Your identity will be kept in strict confidence. The attendee list will not be published before or after the event, and attendees will be introduced by first name only in the session.  The decision to reveal your full name or your company name to your fellow attendees will be left at your discretion.

Who is the Sellability Workshop for?

The workshop is for business owners running profitable companies with between $500,000 and $7 million in gross annual revenue and interested in positioning themselves for a strategic acquisition in the next five years.

Who is the Sellability Workshop not intended for?

This is not an exit-planning event.

I assume you have evaluated your exit options and made the decision that you want to position your company to be acquired. Therefore, if you’re considering passing your business on to your kids, this session is not for you. If you’re considering selling your business to your managers, this session is not for you. If you’re hoping to attend to pitch your services to the business owners in the room, please do not apply.

Please note, I’m not a mergers and acquisitions professional, lawyer, exit planner or insurance salesman. There will be no sales pitch or veiled agenda. You won’t be asked to buy a time share, either. My only goal is that the 16 participants walk out with confidence, inside knowledge and an action plan to position their business for a strategic acquisition.

Grab one of the 16 spots now

To apply, scroll down to the bottom of this page and complete the application form.

DONE DEAL

By Nick Whitmore

When Ken (not his real name) decided to retire and sell the company he’d spent over 20 years building (12 as owner), his business was generating revenue of around $2 million.

Ken’s rental business offered props (e.g., tents, furniture, dishes) and planning help to those organizing graduations, birthday parties and other celebrations. The established rental business had multiple locations, which included retail space and a warehouse for storing the rental inventory.

Unfortunately, the sale of Ken’s firm didn’t go quite as smoothly as planned, with one of the major stumbling blocks being the value of his rental inventory. Ken placed a value of $1.2 million on it, whereas the buyer valued it at just $600,000.

“One of the key elements in a sale like this is getting a handle on the true utility value of the rental inventory,” said Sue Wain, director of business sales at Calder Associates and Ken’s business broker.

After some negotiation, the parties agreed to a sale price of just over $1.5 million, including all inventory, which represents a 6.0 multiple on Ken’s $250,000 of earnings before interest, taxes, depreciation and amortization (EBITDA). The full amount was paid on closing, and there was no earn-out involved in the deal. Real estate was not included in the sale of the business; the seller decided to lease the premises to the buyer.

Wain believes that Ken made a good decision choosing to sell his business. “He didn’t want to make the additional investment required to grow the business on his watch. He felt like he was inhibiting its growth. It was a perfect invitation for a buyer to come in here, but not only buy it—grow it.”

Deal Snapshot

Business type: Party rental
Revenue: $2 million
EBITDA: $250,000
Selling price: $1.5 million *
Multiple paid: 6.0

*includes inventory valued at between $600,000 – $1,200,000

(photo courtesy of Flickr/ *ASAP*)

Do you write a blog, speak at events, Tweet or publish a newsletter to position your company as a leader in your industry? Have you ever considered writing a book to add to your profile?

I wrote my first book back in 2002 to help get Warrillow & Co on the map. I sent prospects a book and they gave me a warmer reception. I’m pretty sure we would not have landed Apple or American Express as customers without my first book as a credibility booster. Having a book also helped with existing customers who paid more attention to what I had to say. Employees and new recruits were also impressed.

The downside of writing a book – or any sort of marketing where you’re the front person – is how closely it ties you to your business; which is what Chris Brogan, the co-author of Trust Agents, found. Trust Agents became a New York Times Bestseller last year and Brogan had offers from people who wanted to buy his digital marketing agency, New Marketing Labs, but all were contingent on him personally sticking around for an earn out. (Read my interview with Brogan to get his perspective on building a sellable company and the perils of being the spokesperson for your business).

This week I also got a call from a brand name author (you’d know his name if I told you) who is looking for some help to turn his business into something sellable. He has written a number of bestselling books, which helped him to create a thriving speaking, education and events business, but it is too dependent on him personally. We’ve agreed to a barter deal where he is going to help me as a newer author and I’m going to help him turn his business into something more sellable.

I think your decision to write a book comes down to one of timing. If you are planning to sell your company in the next 5 years, I think writing a book will tie you to your business too much and may do more harm than good. If your time horizon is longer for getting out, then a book can solidify your credibility, garner respect from prospects and customers and accelerate your growth. I wrote about picking a format for your business book this week.

Do you have a book in you?

(photo courtesy of Flickr/Horia Varlan)

If you have ever pried open something by jamming a piece of wood in one end and applying pressure to the other, you know that leverage can give you more power than usual.

When you’re preparing your business to be sold, assuming you have an attractive asset, you have lots of negotiating leverage. You’ll be courted and discussions will build to a crescendo punctuated by a Letter Of Intent (LOI) presented by a buyer(s).

Your LOI(s) will likely have a “no shop clause” which means, provided you accept it, you must stop negotiating with other buyers. This exclusivity arrangement is the M&A equivalent of getting engaged — you’re not married yet, but you need to act like it.

The moment you sign an LOI, the stick slips out of the crack. The buyer knows you’re committed, but weaker than before and they may use that to their advantage. This would be ok if your fiancée were acting in good faith. Some do, but others don’t. I spoke to a corporate lawyer a while ago and asked him what percentage of the time a deal gets discounted between LOI and closing day. His response: “is there a number higher than 100%?”

The problem is that some professional buyers (strategic acquirers, sophisticated financial buyers) use an LOI to kick your stick out of the crack on purpose. Knowing you’re weakened, they start to change the terms of the deal in their favor: a longer earn out, a bigger escrow, less attractive employment agreement, lower upfront payment — I’ve heard them all.

Last week I spoke to Peter Lehrman, the CEO of AxialMarket which is an online marketplace for businesses for sale. Lehrman offered seven strategies for keeping your stick wedged in the crack after you sign an LOI. You can read his advice in the first two articles I wrote on selling a business below.

(photo courtesy of Flickr/ Neilwill)

Protecting your company’s value during a sale

~ published November 9, 2010 Globe and Mail

If you have ever promised your child a treat in return for good behaviour, you know all about negotiating leverage.

When selling an attractive business, you also have leverage—up to the point that you sign a letter of intent (LOI), which almost always includes a “no shop” clause, forcing you to terminate discussions with other potential buyers while your newfound “fiancé” does due diligence before handing over the cheque. »more

Don’t let lengthy negotiations depreciate your business

~ published November 10, 2010 Globe and Mail

I once asked a corporate lawyer – a veteran of hundreds of company sales – what percentage of the time the sale price of a company gets discounted between when the buyer and seller sign a letter of intent (LOI), and when the deal actually closes .

The lawyer looked at me thoughtfully and, after a moment of reflection, asked, “Is there a number higher than 100 per cent?” »more

The suit who thinks your baby is ugly

~ published November 11, 2010 Globe and Mail

Corporate development executives – the big-company suits responsible for buying businesses on behalf of their CEOs – often resemble heart surgeons: you know they’re smart, but their bedside manner leaves something to be desired.

This, of course, becomes a problem when you’re trying to sell your company and the guy or gal on the other side of the table is getting under your skin. Your business is your baby. You gave birth to it, you cared for it when it was young and fragile, and now that it is all grown up, you love it – warts and all. »more

9 Ways to Make Your Company More Valuable in 2011

~ published November 11, 2010 BNET

As you plan for next year, I’m sure you have a set of goals for your revenue and profit in 2011. Have you also got a list of projects that will drive up the value of your company?

Most businesses are valued on a multiple of earnings, so your profits are one key factor in driving up the value of your company, but the other number in the equation is the multiple of your earnings used to arrive at a price.  The more predictable and exciting your business, the higher a multiple you’ll get. »more