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Warren Buffett, chief executive officer of Berkshire Hathaway, plays table tennis with Ariel Hsing, the number one U.S. player under twenty, on the sidelines of the Berkshire Hathaway annual meeting in Omaha, Nebraska, U.S., on Sunday, May 2, 2010. (Daniel Acker)
Warren Buffett, chief executive officer of Berkshire Hathaway, plays table tennis with Ariel Hsing, the number one U.S. player under twenty, on the sidelines of the Berkshire Hathaway annual meeting in Omaha, Nebraska, U.S., on Sunday, May 2, 2010. (Daniel Acker)

Exit: John Warrillow

Letters to shareholders can help sell a business Add to ...

I wrote recently about how using a public-company multiple as a benchmark for what your business might be worth can lead to disappointment.

However, I did find value in looking at public companies for another purpose: Reading the letters to shareholders in annual reports in my industry helped me see what was important to potential acquirers.

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Take a look at the Forrester Research 2009 annual report, and you’ll see things the company thinks are strategically important.

For example, in the first paragraph, Forrester Research chairman and CEO George F. Colony states: “While renewal rates dropped early in the year, they ticked back to our historical averages by the fourth quarter. We stayed relevant to our clients, and that kept relationships intact.”

My interpretation: In a rocky economy, keeping existing customers from leaving is the company’s first priority.

More from Mr. Colony in his annual letter: “We send multiple sales teams into large companies, each selling to a different set of roles. We believe this gives us the best chance to increase roles per client (3.2 per client at year-end 2009) over the next three years.”

My interpretation: Cross-selling new stuff to old customers is even more important than winning new customers.

Mr. Colony continues: “I’m also glad to report that in 2009 we continued our march toward a 70/30 “Q”/”non-Q” balance. Q is what we call the quotient of our business that is syndicated (RoleView research, Forrester Leadership Boards, and Data), and non-Q refers to non-syndicated business (Consulting and Events). We ended 2009 at 68% Q — up two percentage points for the year — right on our target. We believe that the 70/30 balance is right for our business; it means that our renewable and leverageable product mix remains high while retaining a healthy blend of Consulting and Events. Through many years of experience, we have found that clients who attend our Events and engage in Consulting remain our most faithful and tenured research, Leadership Boards, and Data clients. In other words, the two businesses work well together in the right proportions.”

My interpretation: Forrester likes the leverage of syndicated research but also the profitability of the one-off consulting business.

Finally, Mr. Colony goes so far as to explain to business owners what he is looking for in the way of acquisitions: “Forrester believes that acquisitions play an important strategic role in the growth of the company. The previous acquisitions of Fletcher Research, Giga Information Group, and JupiterResearch, among others, have enabled Forrester to quickly move into new markets, reach new customers, and expand value to existing customers.

“In 2009 we evaluated a number of M&A candidates. Despite our high cash balances, Forrester’s acquisition methodology remains disciplined and structured. We don’t let all that money lead us to irrational conclusions — our deal team establishes pricing based on expected future cash flows. Acquisitions must clear three hurdles: 1) They must be accretive to earnings over 12 to 24 months; 2) they must bring new content to our existing roles or bring new roles; and 3) we must see a clear operational home for the acquisition in our business.

“Strategic Oxygen, a company we acquired from Monitor Group late in the year, cleared those hurdles. Strategic Oxygen’s product helps Technology Product Management & Marketing professionals (one of our technology industry roles) decide where to spend their marketing dollars. We liked Strategic Oxygen because it brought a unique, differentiated service to one of Forrester’s primary roles — with a financial model that fit well with our high-Q philosophy. We will continue to use acquisitions to bring more value to our existing roles and, potentially, more roles to Forrester.”

My interpretation: Given that the economy is still in the tank, and Forrester has money in the bank, Mr. Colony thinks it’s a good time to buy niche companies on the cheap.

Public companies can be an important information source for business owners looking to sell, but I think it makes more sense to read the letter to the shareholder than to watch their multiple or stock price.

Special to The Globe and Mail

John Warrillow is a writer, speaker and angel investor in a number of start-up companies. He writes a blog about building a valuable – sellable – company at www.BuiltToSell.com/blog.

Follow on Twitter: @JohnWarrillow

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