I’ve been involved in mergers and acquisitions for the past 25 years. I’m always asked how my clients and businesses decide who to buy. Why do they choose to buy certain businesses and pass on others? Sitting in a conference on Succession Planning for Private Businesses last week reminded me of my earliest exposure to mergers and acquisitions, including working with a larger business bought by Berkshire Hathaway back in the mid 80’s and then working in several different divisions within that business. I came away understanding a key component to acquisition success is buying companies with enduring competitive advantage in their markets. This hasn’t changed over the length of my career. I was also involved early in my career with several venture funded buyouts that did not work out for either the acquired and/or acquiring businesses. I wondered why it worked out well for some companies while other acquisitions ended in failure. What made some owners financially successful when they sold their businesses, and others not?
As I continued growing in my executive career, I was able to work with several companies who acquired a number of different organizations successfully. Many of my clients for the past 15 years are technology organizations and were involved in developing services for a wide range of emerging technology markets. They grew based on their ability to successfully buy and absorb new businesses in new regional markets. What made them succeed and what can you apply to help make your business more attractive to the right buyers?
The first quality these organizations shared was professional management. Over the years, I’ve discovered that the more professionally managed the firm is, the more likely it is to exceed sales of ten million dollars. A good entrepreneur can build a business up to several million dollars in revenue on their own strengths and capabilities. Once sales exceed 10 million, the entrepreneur needs to begin building systems that support long term profitable growth. They also need to be able to attract a wider range of talent to support their organization’s growth. The entrepreneur needs to spend more time on finding new opportunities for growth and diversifying their client base.
People who buy businesses want to make sure the business has a scalable business development model. Having a few key clients make up a large percentage of your business can be a warning sign to potential buyers. The other thing I discovered is people buy businesses, not organizations. If you want to sell your business make sure it’s attractive to buyers. I’ve seen several organizations fail to attract interested buyers because they have great facts and figures but are unable to share a story that the buyers see themselves in.
The second quality these businesses have is strong strategic partnerships with market leaders. No matter how innovative an organization is at the early stages, they require a significant partner to enhance their brand within key larger accounts. Because of this, the CEO and his leadership team must have good partnering capabilities. They must be willing to find partners that map well with their current technical capabilities if they hope to develop several strategic accounts for clients. They also must work hard to maintain and grow these relationships while also growing their own organization. It is also critical for the leadership team to decide who they won’t partner with during their early stages. Few large partners invest their significant marketing capital with companies who are not monogamous across their key lines of business.
The third quality is the ability to get marquee clients during early stages of the business. Early wins allow the business to fund their expansion plans while providing strong references for their later clients. Most startups fail to realize the value of a marquee client to their marketing efforts. I’ve seen many small businesses fail because their unwillingness to negotiate with their early clients for many critical elements to support their growth. There are many ways to help amplify your early success by negotiating with clients for key intangibles during the early days of the company. Getting early clients breakthrough results is just part of the plan to build a market leading organization. Knowing how to sell your client list is critical to your organization’s success. This success, in turn, increases the attractiveness of your company to potential buyers.
The final quality is having the ability to attract strong talent to your business. During the early stages of the business it is critical to involve your leadership team in attracting great talent. If you want to make your business more valuable, invest at least 25% of your time and energy attracting and retaining key talent for your organization. During early stages of a business you require much from your employees, design your compensation programs from the start to align with your business goals and objectives. You should set up formal mentoring programs to make sure you retain your best employees during these growth cycles. In most businesses, it comes down to the quality of the people working for the organization. Make sure your organization has a great team.
Making your business attractive to buyers may sound a lot like sound management principles. It pretty much is. When someone looks at your business from a buying perspective, they’re looking for a business that can run without the founder and not flounder. That means building a solid management and leadership team around you from the very beginning. The time to think about selling your business is when you start it and as you build it.