CEOs who have never sold a company before often take for granted that if they just focus on building value in their business, the rest will sort itself out. But even the shrewdest, most successful owner-operators can fail to realize this value if they are underprepared for the unavoidable eventuality of any business — an exit.
Investors rarely cut checks to companies when they cannot envision what an eventual exit will look like. Particularly for financial buyers (private equity firms, family offices, etc.) understanding when, how, and to whom they can sell is key in building a return profile for the business, determining a valuation, and ultimately, deciding whether or not to consummate the deal.
Gil Beyda, founder and managing partner at Genacast Ventures, a practiced entrepreneur and investor in early-stage technology companies, recently wrote what he dubbed a “love letter to CEOs,” asserting that companies — even the most promising ones — don’t simply sell themselves.
In his post, Gil suggests that CEOs should think not only about building value for their shareholders and employees but more specifically for the parties that could end up on the other side of a sale process.
Regardless of whether a sale is in the immediate horizon or several years down the road, start thinking of your eventual acquirer as a discrete entity for whom they are building value.
Thinking about the eventuality of the business is one of the first things Genacast does when considering an acquisition target. “When we do our diligence process, we ask ourselves and ask the company, who are your potential acquirers,” Gil says. If there isn’t an easy list to compile, some investors may take this as a signal that the dynamics of the business aren’t solid enough to warrant an investment.
So if investors and buyers are always thinking about the exit, even in the early stages of backing of acquiring a company, why shouldn’t an owner do the same? Here are a couple of ways to frame your thinking around building a business with a buyer in mind.
Understand the Why
The reason a company gets acquired depends on the specific buyer. Each prospective counterparty will have a unique set of characteristics they are looking for in a target company. It’s important to understand all of the different reasons your company may get acquired (for intellectual property owned by the company? For a hard to access customer base? For a highly skilled team?).
If you have a preferred buyer type in mind (based on your exit priorities) then focusing on the area of value that seems most relevant to them is one strategy to make the business increasingly attractive to that particular party.
Test the Waters
In Gil’s experience, some of the best acquisitions are born out of partnerships developed during the course of business. Conversations will evolve as a partnership becomes more successful and one company sees an opportunity to expand. “Few acquirers come from out of nowhere and make multi-million dollar offers to acquire companies with whom they have no previous relationship,” he writes.
Knowing this, you can be more proactive about developing such relationships. Which of your eventual buyers can you do business with today? If you believe your company could eventually be bought by a larger company, a distributor or supplier, or even a competitor, developing a mutually beneficial relationship before bringing your company to market may be the best way to test out synergies.
Get Your Name Out There
Many will stress the importance of engaging advisors and bankers early in the process for information on what other buyers and sellers are doing. Of course, the more intel you have, the better. But there’s another reason to strike up relationships with bankers in your space.
Helping intermediaries understand the nuances of the industry and allowing them some insight into how you are managing to take advantage of them will make it more likely that your company comes up during their conversations with other buyers and sellers in your market. The more you are talked about, the better: you never know what will pique a potential acquirer’s interest.