September 10, 2021
When thinking about selling your company, there are typically two types of buyers at the table: One group will be sponsors, otherwise known as private equity groups. The other group will be strategics, meaning companies that operate in or around your space.
These strategics can be extremely high risk, but carry a high reward if you end up completing a deal with them. That reward is typically demonstrated by the highest prices (not always true, but sometimes).
The risk is that sharing information with these companies could be giving information to a direct competitor, or a company looking to become a direct competitor. To reduce risk and keep the reward, here are 5 questions you should be asking strategic buyers before you share too much information:
Highlighted in the name of the buyer categorization, strategic, is strategy. They need to have a reason as to why your company adds strategic value to what they are doing. That strategy can come in many forms. Maybe they want your product to sell to their larger existing customer base. Maybe they want your customer base to sell their product into. They could want your team or even just an individual (acqui-hire became a popular term a few years back). In any case, you want to understand what they want to be the strategic reasoning for why they’re interested in acquiring you. The stronger the case they make, the more likely it is that they will come in at a high price and have a high probability of closing. If the strategy doesn’t add up, they may just be on a fishing expedition to learn about you, your product or your market as a means to discover if they should expand organically into that segment.
Integration is the plan for how closely your business will work with the acquirer. Generally, this means that unless your business is going to be operated independently, there will be some aspects of your company that won’t look the same post-acquisition. They may not need your product, certain people on your team or even office space. Integration will tell you what your company will look like in the new company.
Strategics eventually require liquidity. Unless you’re selling to a public company, there is most likely an “exit plan” in place for when they plan on selling the business. If they plan on selling the business in 2 years (a short time), you’d want to understand how that changes your role or what they would want from your team. If they plan on selling in 10 years, it likely means the operations of the company will be very different from a day-to-day perspective.
The plan for your leadership team is important. They may have a plan to replace you, change your roles or leave you alone. Regardless of what that plan is, it’s important to know what that is so that you can plan accordingly. You’ll want to communicate that plan to your broader team and consider if those roles are even something you and/or they would want to do. This part is very important because you'll need to decide where you will be working and spending the most time in the future.
Why not learn from others that they may have worked with before? In any case, it’s always a best practice to ask a buyer for references. You’ll get to find out how they’ve interacted with others, which is generally a sign of how your interactions will go. Gathering this data about your potential future partner will ensure that you know what you are getting yourself into. Take a look at some founder perspectives from Michael Ciaglia at AuthorityLabs and Gavin Hammar at Sendible.
Give these questions a try if you’re entertaining the idea of selling to a strategic. Arming yourselves with these answers will put you in a position to reduce your risk while capitalizing on the reward. If you've received emails from investors and buyers, take a look at our blog post on "Approaching Investor Emails as a SaaS Founder." If you have any questions, feel free to contact us.
Missed last week's post? Take a look here: "Golf and Business Are Not a Game of Perfect."