A mentor recently lent me a copy of Strategic Entrepreneurism (SE) it only takes a few hours to read and is well worth making time for! It’s a book that changed my perspective on business and is invaluable if you are interested a long term career in start-ups.
There is a set number of options for a business, it's founding team and investors.
The business fails.
The business grows and the founders spend their life running it.
The business grows and the founders hire managers to run it, founders and investors then profit from dividends.
The founders sell the business through a trade sale, MBO (management buy out), or initial public offering (IPO).
Strategic Entrepreneurism focuses on selling the business as the founders main objective. Thus enabling them to go on and set up a new venture, or invest in other startups with their hard earned capital. While some founders may have qualms about building a business to sell, lets leave the arguments aside and focus on the mechanics.
It is statistically unlikely for a start up company to make it to IPO. Thus the authors of SE argue that founders and investors should focus on the most probable form of exit, a trade sale. This is when one company, buys another company. It's incredible to think that in the last 12 years google has acquired 127 companies - Link
Structuring a business for sale requires an understanding of the business buying market. There is plenty to consider when trying to understand why a company buys another here are the basic three questions:
1. Which companies are acquiring, and are there any patterns in their acquisition trail?
2. Why are they buying?
3. How much will they pay?
These questions are very industry related, but with their answers a business founder can create a strategy that will take the business to a trade sale. Creating this strategy is the main focus of SE, which states that understanding the market place in terms of acquisitions makes it must easier to plan how a business should develop.
It can guide on:
- Who should your target customers be? Is a large company in your industry acquiring because it want’s access to a specific customer base?
- What should your team look like? If you put together a team of incredible developers will the company be bought for the engineering talent?
- Is your business built on sustainable revenue or size of user base? Can you business make it to a trade sale without generating revenue, or will you need a sales team?
- How much funding should you take? If you take on too much growth capital maybe there will be no one in your industry with pockets deep enough to buy you. It's interesting to note that the more investment you take the larger your exit has to be. This is why most VC backed companies do not exit via trade sale - ARTICLE LINK
To get a better understanding of how exits worked I had lunch with a friend and mentor Karen Darby, who successfully sold her company Simply Switch via a trade sale to the daily mail group for £22million. To facilitate the sale Karen proactively contacted Longacre Partners, now part of the Jefferies Group, a company that specialized in facilitating trade sales of one company to another. Longacre acted as an advisor and used it’s extensive contacts to line up a number of interested acquirers. Karen pitched to potential buyers at the advisor’s office, initially the Daily Mail Group made a low offer, while the Mirror started with a high offer, however the Mail revised and increased it’s offer and the Mirror could not match it!
It turns out that selling a business can be costly. Longacre charged a £500,000 fee contingent on a successful sale, while the legal fees for the deal cost in total £700,000! There are a number of companies that are focused on facilitating trade sales. In the Technology merger and acquisition market http://www.jmoorepartners.com provide consulting services, while legal firms also specialist in trades sales such as http://www.orrick.com. Even start up companies are trying to facilitate trade sales - http://exitround.com!