Four Factors That Increase Exit Odds

In the classic Steve Martin bit from early Saturday Night Live days, he’s a pitch man with a compelling hook: “How to make a MILLION DOLLARS and NEVER PAY TAXES!” After dramatically repeating the offer several times, he pauses to reveal the answer: “First, get a million dollars. Then…”

This post might be called “How to BUILD A VALUABLE COMPANY and SELL IT FOR A FORTUNE!” The first easy step? “Build a valuable company.” Assuming that you’re already doing that and your exit strategy centers on being acquired, four factors will impact success:

  1. Strategic importance of your product/technology/service
  2. Intensity of the competitive environment
  3. Existence and visibility of urgent, unsolved customer problems
  4. Presence of an insider relationship

Strategic Importance

Gauging the strategic importance of your offerings to a potential acquirer’s portfolio of capabilities is critical. Imagine all acquisitions resting along a value continuum. On the left end are low value (for the seller!) types of acquisitions like asset sales. Moving toward the right are transactions whose value is based strictly on financial parameters (e.g., discounted cash flow).

At the extreme other end of the continuum are companies whose value is so strategic to the acquirer that revenue and profitability are of little consequence. An example I’ve seen is a small software company with technology that uniquely solved an urgent problem for a multi-billion dollar enterprise. The valuation received was such a high multiple of the acquired company’s revenue that its financials were almost irrelevant to its value.

A common mistake in identifying potential acquirers is casting too narrow a net. Try listing 20 potential acquirers. Listing the first half dozen will be easy, but most of those are likely more financially-driven than strategic. Building out the list of 20 can lead to a discovery of previously unrealized strategic value in adjacent spaces. 

 

Competitive Environment

A company in a highly competitive environment is motivated to move quickly to close gaps in its offerings. The trick is connecting during the time when the potential acquirer begins to realize it has to act. Wait too long to engage, and they will solve their competitive challenges through internal efforts, or by partnering with or acquiring another company. Getting on their radar at the right time is critical.

 

Urgent Customer Problems

An acquirer with a strategic competitive need is caught in a situation characterized by two attributes:

  1. A high-impact opportunity or threat exists.
  2. The company has a weak ability to respond.

Nothing will drive the acquirer forward faster than demands from customers having problems solvable by the incorporation of your company’s products, technology, or services. An effective way to validate value to the potential acquirer is to engage them in a proof of concept to solve a real problem.

 

 

 

 

Insider Relationship

The presence of an insider relationship is often the single most important success factor in getting and staying on the acquirer’s radar. Developing an internal champion who is already convinced that the companies should be working together for mutual competitive reasons optimizes the odds of success.

If you have an insider relationship with a target acquirer, use it; if you don’t, get one. Having already built a strong industry network will pay huge dividends at this point.

 

When to Prepare

Early in the life of a company, management has to focus on building a strong business. Deep analysis in preparation for an exit can be a distraction at this point.

Waiting too long to apply exit strategy thinking, however, is also a mistake. Once the business starts to prove itself, begin investing for the future by creating a valuation framework for your company. Build and maintain a list of 20 potential acquirers. Understand what clusters of acquirers need in order to grow. Fill gaps in your offerings to fill those needs and increase your value to potential acquirers.

Start building your exit strategy 12 to 24 months in advance of searching for an acquirer. By the time you decide to enlist an investment banker’s help, you’ll understand the universe of potential acquirers, you’ll have moved into a strong position that maximizes your valuation, and you’ll arm your investment banker with maximum ammunition and motivation.

Technology Is Changing the Face of Business

Although I’m not a professional futurist, it’s hard not to notice commonalities found within hundreds of conversations with diverse teams and individuals who are busy defining new businesses. Five interrelated trends seem to be rapidly changing the face of business by disrupting existing models:

Deepening Technology Dependence – Such an obvious observation certainly won’t garner me any futurist credentials. This reliance first began decades ago with large enterprises, but now even the smallest incorporate multiple forms of technology to increase their efficiency and effectiveness. As technology consumption increases among small companies, their influence on the evolution of new technologies will continue to increase.

Ubiquity and Mobility Enabling Distributed Operations – This second trend may be having the most profound impact. If you’re seeking an opportunity to form a new business, simply examine businesses that remain highly centralized and ask, “What if we broke this into parts that communicated with each other and were accessible by mobile devices?” You’ll find that opportunities abound in industries as diverse as utilities, healthcare, and manufacturing.

Loosely Coupled Systems – The decades-long conflict over the efficiency of deeply integrated systems versus the flexibility of modular systems is over, and the winner is… both. Distribution of function across reusable modules delivers economies of reuse. Loosely coupled systems employ web-based connection mechanisms that allow rapid communication while avoiding dependencies that often slow development.

Discovering Trusted Vendors – Large enterprises have maintained their dominance for decades because of their reach across diverse geographies and economic domains. Better solutions from smaller companies have eventually been acquired by companies could successfully sell into the huge bases of customers who’d grown to trust them. Finding a trusted vendor now has evolved into searching the world for products and services that match our requirements, and trust can be built based on massive and readily available customer ratings.

Increasing Irrelevance of Centralized IT – While a highly respected friend’s belief that IT groups will disappear may be overstated, The centralized IT group’s impact on business priorities will continue to diminish. Technology has become so central to distributed business units that they risk falling behind competitors if they wait for or look for direction from IT.  The issue is too central to their success to delegate it.

These trends and their effects are intertwined, reinforcing, and multiplicative. Awareness of them provides a context for both evaluating new business initiatives and estimating the life expectancy of existing enterprises.

[Thanks to A+ friends whose coffee conversations inspired this post, especially John Long of Trellis Partners and Jeffery Palermo of Clear Measure.]

 

 

2014 Issues for a 2016 Exit

Joel Trammell requested a guest post for his American CEO blog, and it’s called 2014 Issues for a 2016 Exit. You’ll find many other great thoughts for CEOs there, and since it’s a two-part article, subscribe there and/or here to make sure you get the second half next week.

Self-Fueling Partnership: Apple and AT&T

“In this new wave of technology, you can’t do it all yourself; you have to form alliances.”                           -Carlos Slim Helu 

Addressing startup entrepreneurs at RISE Week Austin, I asked, “If the richest man on the planet thinks alliances are critical, shouldn’t you?” (As a four-time startup survivor – 1985, 1995, 2000, 2002 – I’m driven to give CEOs the knowledge and passion they need to accelerate growth through partnerships.

The Apple/AT&T partnership was a classic: Apple sought broad distribution while AT&T needed new technology. Together they demonstrated how to create a self-fueling partnership, i.e. one that is structured such that positive results for the first party drives it to act in ways that increase positive results for the second party, and vice versa.

Let’s dissect this well-known business case to identify a few principles of “self-fueling partnerships”:

Principle #1   “Partner when the impact of a threat or opportunity is high, and your ability to respond is weak.” 

Apple had an innovative product that needed to be deployed rapidly in order to grab the top spot in the emerging smartphone market. The opportunity was huge, but the carriers controlled access to the customers. AT&T, on the other hand, wanted to grow its data services revenue, and a killer product would help to capture more subscribers.

Principle #2   “Develop a compelling approach before approaching the other party.” 

Apple based their approach to AT&T on its need to capture new subscribers by raiding other carriers. Since people are reluctant to change carriers, AT&T could afford to heavily subsidize the iPhone in exchange for the long-term annuity they’d build from people who switched to their network.

Principle #3   “Be willing to provide exclusivity if you can limit the time and geography.” 

While Apple wanted to grab the #1 spot with rapid deployment, they knew they’d later have to extend distribution through other carriers after significantly penetrating AT&T’s base.  A good bet is that Apple agreed to extend exclusive access to iPhone for as long as AT&T continued to meet aggressive growth goals, then at a later date, Apple would be free to sell through other carriers.

If you have other interesting partnership examples, let us know!.  

 

Register Early for RISE Week Austin!

Registration is now open for RISE Week Austin to be held May 13-17. Named a “Must-Attend 2013 Conferences for Entrepreneurs” by John Hall at Forbes, the event “offers a variety of events, including fast pitch competitions, funding forums, and talks from well-known keynote speakers.”

In a session called “Self-Fueling Partnerships” on Friday, May 17, we’ll discuss how to grow revenue and profits by leveraging the marketing clout, technology, and customer base of larger companies.

To ensure quality interactions, only 25 people are can attend each session, and savvy attenders sign up early.

See you there!