Buyers Profiles – Strategic vs Financial Buyers
You’re going to have two types of buyers for your company, a Strategic Buyer or a Financial Buyer and their profiles are significantly different.
In this post, I’m not talking about a merger of equals. I’m talking about selling your startup to a company that has the cash and/or equity to purchase your company and provide a return to the investors, employees, and founders.
A Strategic Buyer is in your market or an adjacent market and sees the value of adding your product line to their customer base and occasionally their product into your customer base, assuming it’s a large customer set. Usually, big companies have product roadmaps they are building and when it comes to an acquisition, they are making a build or buy decision as they look at your company and products.
Buying provides speed to market for them and creates additional value.
Big companies aren’t known for continuing to build innovative products, it becomes easier for them to acquire innovation. Clayton Christensen breaks this down in his classic, the Innovator’s Dilemma. Do you have a list of your likely up-market buyers might be? With contacts? Have you started a relationship with them yet?
I don’t usually see this as a risk to them copying your product or idea. So when you have a chance at a trade show or event, go out of your way to make some early connections. Just don’t give up any trade secrets.
Big companies have teams that do both business and corporate development as well as product leaders. You’ll find the front door into many of these relationships is through business development and partnerships. From there you’ll meet with the Corp Dev team if you’re looking at a deal. Don’t undervalue the Product owner/sponsor relationship in the process. If you have a product sponsor you’ll better understand how they see your product mapping to their roadmap.
From a positioning perspective, it will be important that you position the early business development relationship as what is good for them – not just that it’s good for you!
Strategic Buyers will be less price-sensitive. That doesn’t mean they will rain cash down on you! They are still going to look at your financials and Pro-forma budget. They are likely to give you a slight bump in valuation for having a quality team.
You’ll likely see a mix of cash and stock on the purchase price. Look for milestones to drive additional value and earnout based on those milestones. Sometimes these milestones are simply employee comp and bonus vs. broader payout to other shareholders.
Financial Buyers can be called by a number of names, most often it’s Private Equity. These firms have raised capital to invest in purchasing controlling interests in firms with an eye on their cash on cash returns vs. synergy.
These groups are going to have a well-tuned financial model and look to have half of their initial returns built into the original purchase price. They also have a timeline for cash returns so they can put that capital to work again in future investment.
Platforms and Plugins are a way to look at your acquisition. Are you the platform they can add additional companies to in the future? Or are you a plugin to their existing platform companies. Have you seen a list of companies they have acquired already?
You should know going into this relationship if they are looking for your team to run the company. Typically they don’t have teams on the sidelines waiting to run a company. You’ll learn a lot about these buyers by looking at their websites and talking to CEOs who have been acquired in the past.
This type of investor will also consider taking some historic shareholders off the cap table or providing some liquidity for founders if you want to stay with the company. Then use some of the capital for future growth and accelerating the business.
It’s important to know the milestone expectations here as well. Remember fuzzy expectations will mean confusing or limited payouts. There’s no reason to have that happen. Nail down expectations and milestones as part of the deal docs.
These are the type of organizations that start calling you before you’re ready to sell. It’s the role of the Junior Associate to “dial for dollars” and do outreach. It’s a compliment, but before it goes to your head, just know that they want to talk to you before you engage a banker and shop the deal.
Remember, the best option is to create competition and increase the overall value of the deal.
Have a question, reach out, dave.parker@startupdigestmail.com, or click over to www.dkparker.com for my blog and additional resources.
Cheers!
Dave