Following my last lesson on Determining Exit Options for Your Startup, today will will discuss how to find both strategic buyers and financial buyers for your business.
Finding a strategic buyer for your business is the most likely liquidity event scenario for your startup. Remember, a corporate buyer is only going to buy you if you bring them some sort of value to their business (e.g., your technology, market share, client list, cash flow, growth vehicle for them). So, you need to critically assess what the core assets of your business are, and identify a list of targets that would find such assets most useful.
This could include direct competitors in your exact business, looking to grow market share (e.g., Office Depot acquiring Office Max). This could be a similar business looking to expand their product line (e.g., Amazon acquiring Zappos to get into shoe business). This could be a tangential business, serving the same demographic, looking to diversify revenue streams (e.g., commerce company Expedia acquiring media company Trip Advisor, both in the travel space). And, this could include entirely different businesses altogether that have synergistic technologies (e.g., eBay acquiring Skype to allow commerce buyers an easier way to communicate with each other). These are just a few examples.
When I was selling iExplore (online adventure travel website), I had considered direct competitors like Away.com and Gorp.com, trying to increase market share. Big online travel agencies like Expedia and Travelocity, looking to get into the adventure travel space. Offline travel companies like Abercrombie & Kent and TUI Travel, looking to increase their expertise in online e-commerce. Travel content companies like Travel Channel or Lonely Planet, looking to add a commerce offering around their content. Companies like Spafinder or Luxury Link selling into similar high end demographics. Big online portals like Yahoo or Google, wanting a platform in the travel space.
So, critically assess your business and think creatively who such targets could be. And, remember, the bigger the buying company, the bigger your business needs to be to get their attention. Expedia wouldn't even talk to iExplore, without having $5MM in EBITDA, since any acquisition smaller than that, was less than a decimal point rounding error for their multi-billion dollar business. The flipside of this is, the small the business you approach, the less likely they will be able to fund an acquisition with free cash or otherwise, which may push them to only considering a stock-based deal (which may not be as attractive to you as a cash based deal). So, prioritize your prospective suitors accordingly, to find the right mix of business size and liquidity to increase the odds you get to the finish line.
As for finding a financial buyer, it is very similar to How You Raise Capital for Your Business, which we covered all the way back in Lesson #4. The primary difference is the stage of the business and the types of investors you approach. Most likely, by the time you are ready to sell your business, you have grown to the scale of a private equity investor (later stage), instead of a venture capital investor (earlier stage). Private equity firms will be looking for high cash flow businesses, that will allow them to lever up the business with debt (to reduce their equity investment), and pay off the debt over time with the cash flow from the business. So, make sure you have at least $10-$20MM of revenues and $3-$5MM of positive cash flow, before approaching a private equity firm that has experience in your industry.
If you are less than this, you are most likely taking about negotiating a "recap" with a venture capital firm, which is a lot tougher to do, since venture capitalists prefer their cash to grow the business, not take out selling shareholders. And, remember, both private equity firms and venture capitalists are not going to play unless a going forward management team is in place. So, plan accordingly with members of your own team, or otherwise.
In my next lesson, we will discuss "How to Structure the Sale" of your startup.
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