Find out what you need to do for a compelling deal

I have sat through countless business strategy meetings where the only form of business value creation is growth in revenue and profit and yet it is clear that the highest exit value would be achieved by a strategic sale. By a strategic sale I mean a sale to a large corporation who can rapidly scale up the products or services created by the investee firm. Even when it is accepted that there is a near term exit objective, the discussion of the management team and their advisors has been fixated on proving the business model as if this is the key to closing the trade sale.

In a strategic sale, the business creates value on sale because the buyer is able to exploit an underlying asset or capability of the investee firm to generate new revenue. Clearly the best buyer is one which can rapidly scale the operation and use its existing extensive distribution channel to take the product or service to market. In that case, the major elements of the business model are already in place – the buyer has them right now. So if we are not setting out to prove the business concept – what should we be doing?

What should you look like?

The key to a strategic sale is to provide the buyer with the evidence to allow them to make the acquisition decision in your favor. So we might start with the prospective buyer’s acquisition criteria. If you don’t know it, why not go and ask them. That may seem a bit bold but large corporations do have very well defined criteria for an acquisition. They also have what you might call preferred situations – that is, they can live with some issues but they would prefer to avoid them. Most M&A departments will share the information with you as it helps them in their final selection.

Another approach is to think though how a prospective buyer would exploit the acquisition. What could you do to enable the buyer to more quickly scale up the revenue generated from the acquisition or more easily integrate the new business into their own. What evidence do you think the buyer would want to see to convince them of the value of the acquisition? It may be patent registration, customer testimonials, quality data, expert opinion, marketing surveys and so on.

Optimise your positioning

What you don’t want to do is to undertake any activity which distracts you from the strategic trade sale strategy. If you don’t need hundreds of customers, overseas distributors or a multi-lingual web site to prove you case – then don’t do it. Keep in mind that you are building a business to sell to a large corporation which has the capability and capacity to rapidly scale of the activity. You are simply giving them enough information to allow them to make the acquisition decision. If you have selected your buyers correctly, they will know how to do the rest.

If in doubt – simply go and ask them what proof they would need to make the acquisition decision in your favor and what they would like to have in place to allow them to quickly exploit the opportunity. What you find out should determine your development strategy.