A client of mine was approached by a foreign company the other day which wants to develop their product in my client’s’ territory. The obvious first overture by the big co was to find out how large my client is and determine the appropriate acquisition model. The big company, we will call Xenon, suggested a collaboration where they install their expertise in my client’s software and sell it as a more robust package. You can call this the synergy approach where the whole is greater than the sum of the parts.
Xenon had only briefly mentioned the word ‘acquisition’ but I felt it might be more a problem than my clients think. The more I looked at the scenario that could unfold the more I wanted to explain to my clients what the acquisition model might look like once they had moved into our territory. Xenon had a few reasons to form an alliance then acquire my client’s company. Xenon had already captured 50% market share in their country and had no where to go except new markets with a similar product base and similar demographics.
Why would a company want to acquire another smaller company? Here’s a few considerations to ponder while you try to figure out how much your business is worth to a potential buyer (that’s another blog topic).
To Build a Product
Why would Xenon build a totally new product when they can just buy one with existing customers and proprietary software developed over two years? Exactly â€“ a proven product with sales is a better catch than Xenon’s product development team working several months trying to redevelop or re-engineering someone’s great product then have their sales team try to market and sell the new product in a foreign market. It’s much easier to buy an existing one.
I have a share in a software company that has an app for banking. When we approached a national bank they thought it was amazing but said they already had allocated $20million to develop their own. Pretty silly comment when our price to them was about 5o cents per customer per month. They still don’t have their app created after 4 years.
To Kill the Competition
I love this one cause it is diabolical. Sun Tsu would agree in his Art of War. When I was in university an engineering buddy of mine developed a product that increased car engine life many fold. He was approached by an engine company that bought him out before he was even out of university. They proceeded to hide the formula deep in a vault somewhere. Ford didn’t want cars that would last forever. They sell cars.
Many software businesses that no longer exist were dismantled this way because it was easier to buy out the little guy and make him disappear to avoid competition down the road.
Priming the Pump of an Existing Sales Channel
Every company needs new clients so imagine when a big company has pushed each of it’s distribution channels to the limit. What do they do? They need new products which they can get by acquiring a new company and product line. This gives the established company more fuel in the system and since they are established the new products take on recognized trustworthiness.
A gaming developer client was approached by a big conglomerate to buy his small 3 guy gaming engine business. A great price was offered and rejected by my client because as part of the deal the owner and his 2 employees had to work for the new owners and develop programs for him as employees. Although the salaries were great and the picture looked rosy this true entrepreneur said no to the deal.
To Control a Market
My client fits this rationale as well as a couple of the others. When a big company wants to control a market it makes sense to go into a market and buy up complementary businesses that will enhance the big company’s offering. It’s like Ford Motor Company buying up a parts distribution business. It makes sense and goes to the reason why build a new mousetrap.
When someone approaches you about partnering or alluding about acquiring your business be aware of why they think it’s a good acquisition and be ready for the discussion about money. I have clients who have an exit strategy that includes being ‘bought out’ by a bigger company for millions. It happens!
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