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An employee poses for photographs in front of Miquel Barcelo's 'Faena de Muleta' during a photo call at Christie's in London, June 24, 2011. (Akira Suemori/AKIRA SUEMORI/AP)
An employee poses for photographs in front of Miquel Barcelo's 'Faena de Muleta' during a photo call at Christie's in London, June 24, 2011. (Akira Suemori/AKIRA SUEMORI/AP)

Value: John Warrillow

The right kind of buyer will pay much more Add to ...



If you’re planning to sell your business one day, you’ll have two potential kinds of acquirers: a financial buyer or a strategic buyer.

A financial acquisition is more common, but a strategic buyer will fetch you a higher price.

Financial buyers purchase your company’s future stream of profits, so they will evaluate what your business is worth by focusing on your profitability – and the likelihood of those profits flowing in the future.

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Since buying your company is likely riskier than putting their money in government bonds, they will demand a higher return on their investment and will therefore need to purchase for as little as possible.

The result is that most financial acquisitions stick closely to the normal range of multiples being paid for businesses like yours.

By contrast, a strategic buyer develops an offer by estimating the value of your company in its hands. The math that a strategic acquirer does starts with imagining what would happen if your company were grafted onto its platform.

There are many reasons companies make strategic acquisitions, but here are three:

Lipstick on a cow

A company might make a strategic acquisition to pump new life into an aging cash-cow product. I imagine that one of the reasons Microsoft Corp. bought money-losing Skype for $8.5-billion was to embed the popular calling platform into its next version of the Windows operating system, thereby strengthening its case for companies to upgrade to its latest version.

Net Market Share estimates that nine in 10 of the world’s computers – more than a billion machines – run on a Microsoft Windows system. The trouble for Microsoft is that only one in four of those users have upgraded to Windows 7. More than half are still using Windows XP, and just under 10 per cent are running the Windows Vista platform.

A slick Skype integration could make the next version of Windows a compelling upgrade, which is one reason Skype may end up being worth the price Microsoft paid.

With Microsoft’s acquisition of Skype, you can clearly see the difference between a financial and a strategic acquisition. Given that Skype was losing money, it was technically worthless using traditional financial models yet, strategically speaking, could be worth billions to Microsoft.

Product in the bag

A company with a large, underutilized sales force could buy your business so that its salespeople have another product to pull out of their bag.

AOL Inc., for example, acquired the Huffington Post in large part so that its salespeople could sell the Post’s advertising inventory.

Again, AOL wasn’t buying the publication’s future profits (it turned its first meagre profit only in 2010); it was buying the advertising inventory, which AOL could monetize because it had salespeople who needed more premium inventory to sell.

Market gateway

Another reason that companies make strategic acquisitions is to gain access to a distribution channel. Often, gateway acquisitions happen when a company wants to enter a new geographic market with big cultural or language barriers and corresponding high costs of acquiring customers.

High-end office furniture maker Herman Miller Inc., for example, recently announced plans to acquire Posh Office Systems HK Ltd., a Hong Kong-based furniture maker generating $50-million in annual sales.

Here’s an excerpt from Herman Miller chief executive officer Brian Walker’s announcement of the deal: “Through Posh, we gain immediate access to the Chinese market. As the demand for high-quality seating and furniture continues to grow in the region, we anticipate a significant increase in the sales of Herman Miller products through the Posh dealer network.”

One way to think of the difference between a financial and a strategic acquisition is to compare buying a new car to investing in a piece of fine art.

When you buy a car, you go in having a good idea of what it’s worth. You take a look around and see what other dealerships are charging for the car. You do a quick search online, and you go to the negotiation at the dealership armed with enough data that you’re going to end up buying the car for plus or minus 5 per cent of what almost everyone pays.

When buying a piece of fine art at an auction, however, there is no agreed-upon price for what you’re buying. The price comes down to what it is worth to the people in the audience. At an auction, beauty, and value, are indeed in the eye of the beholder.

The key to positioning yourself for a strategic acquisition lies not in your financial statements but in figuring out what you could be worth in someone else’s hands.

Special to The Globe and Mail

John Warrillow is a writer, speaker and angel investor in a number of start-up companies. He is the author of Built To Sell: Creating a Business That Can Thrive Without You, published by Portfolio Penguin.

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