The Company as the Product

Building a company that can be sold is building a different product for a different customer.

Serving two masters – but they are compatible. The first master is the customer who buys your product, and the second master is the one who buys your company.

Most entrepreneurs lose sight of the fact that the acquiring company is their “real” customer and their “real” product is the business as a whole.

The “business as a whole” is the “product” to two people: the investor and the acquirer. Today, we will talk about the acquirer.

The “business” is the “product” being “sold” to the acquirer.

When you start thinking about the acquirer being the customer and the entire business as the product, your frame of reference changes. Rather than selling widgets/services to a consumer, you start focusing on what the acquirer wants.

There are distinctly different “customers” that might buy your company, and your business might be a better fit for one type of acquirer than another. However, it always makes sense to appear to the widest customer base in a small market of a handful of companies that might buy your company.

Understand what motivates the acquirer and optimize for that.

Why would an acquirer buy your company? It is not as simple as you might think. Giant corporations are not monolithic buildings, they are individual people with their own set of motivations, goals, ambitions, expertise, and plans. There is always competition inside big corporations. Resources are limited, so there are fights for capital, marketing bandwidth (we can’t launch too many products at the same time), production bandwidth, and countless other resources.

There is always a Champion inside the acquiring company who will lead the sale.

Your company needs to be positioned in a way that the Champion is motivated to sell it internally. In some cases, you might be able to target the Champion ahead of time, but in many cases, you might not know them until after they show interest, and even then, you might talk to the underlings while the real Champion is working behind the scenes.

The internal Champion might have weirdly (and wildly) different motivations.

A Champion might be interested in the customer list only. They can grow their division by expanding the reach of the acquiring company’s other product lines. They might throw away the technology just to get to your customer list.

A Champion might have a short term focus on revenue. They may want to add your revenue to the division to meet their revenue growth projection. The internal accounting for the company may be that the capital used to buy your company comes from one budget but the revenue is realized on the Champion’s bottom line right away. This helps the Champion meet their revenue goals and “look good.” This Champion might be very short-term focused.

A Champion might want your technology to bolt-on to their product portfolio. A new product means a new excuse for their salespeople to make a customer call. They might sell your product (newly-acquired) or they might sell existing products. This Champion might not want your customer list at all because your customer list may be a subset of their existing list.

A Champion might want to make a name for themselves. Many ‘deal makers’ float around the upper management of large corporations, doing deal after deal. These Champions often get the new acquisition “on its feet” for a month or two, then flitter off, leaving someone else to clean up the mess.

The unlikely scenario is that the Champion wants your team to continue to develop new products. Nobody likes outside people who profess to be smarter and more inventive than the people already in the corporation.

Your pitch deck to the acquirer should hit the notes that the Champion needs to see. The deck needs to be strong enough so that the Champion can share it around and use it to develop their own investment memo. It needs to have what the Champion needs personally, but also what the Champion needs to sell to their boss and their colleagues. This is a tricky situation because you often do not know what the Champion really needs. Almost always, the Champion needs a little of everything and not just one thing.

Who is the Champion?

The “best” Champions have two interesting characteristics.

Champions who are new to the company are the best. High level managers are often brought in as ‘change agents’ to shake things up. They have no institutional baggage of “we tried that already.” (Second to the New Guy is the Recently Promoted Guy or Just About To Retire Guy.)

These Champions need to move fast and make the biggest changes possible, consequently, they will take the most risk. On the downside, these Champions can face enormous internal headwinds, as all the long-time managers who “worked their way through the ranks” resent the New Guy.

The New Guy has a honeymoon period at the new job to make a name, so identifying that person and getting in front of them quickly is essential.

The second characteristic is someone with enough discretionary power to do the deal. Ideally, the Champion is someone who has decision making authority up to the acquisition price. If you are talking to someone who only has authority to acquire a company for $100M, pricing the company at $110M is a huge problem.

If the Champion does not have decision making authority, they have to go up the food chain to get approval. That may be a lengthy, painful process and they might not have the political capital to spend – or may want to spend that capital in another way.

Pro tip – LinkedIn’s Sales Manager has an option for searching for people who recently joined the company or were promoted.

In general, if your Champion fits the description above, your diligence will be minimal and the deal will get done. If your Champion is a long-term employee at their current position, even if they have decision making authority, they will be very cautious about acquisitions, as they can sink their careers if it goes poorly. Expect excruciating due diligence and a very lengthy courtship before consummation – if that ever happens.

The market leader as the acquirer.

Market leaders often acquire small companies not for their technology, but to put the technology on the shelf. This has happened countless times in dialysis, where the incumbents have tens of billions of revenue in overpriced, slow, inefficient, but tremendously profitable business. They buy companies in the space, then shelve the technology so it never sees the light of day.

They buy companies to remove competition.

These companies get acquired for the proverbial joke of $1M for each engineer minus $100K for each MBA. They are acquihired and put on garden leave, much like Big Head in the “documentary” Silicon Valley.

No market leader is willing to upset the internal competition, internal power dynamics, and internal empires by acquiring a competing technology. The newly acquired company would be getting all the resources, but more importantly, getting all the glory. It creates a black eye to all the internal managers – and makes it impossible for the acquired company to function when everyone else hates them.

The pitch deck for this acquirer will show how this genie could get out of the bottle and decimate their incredibly lucrative product line. Few large companies want to bring in a competitor that will make them look bad, which is why the pitch decks that bad mouth the BigCo do not help.

There are cases where the market leader actually does make acquisitions, but they should not be the first target.

The better acquirers will be companies who compete against the market leader.

The best acquirers will the those who want to compete but have not put the infrastructure in place. By acquiring a company with (1) technology that works and (2) a customer base, they can bolt-on a new business and grow it.

For startup companies with real technology, real revenue, and real growth potential, you are most appealing to a company who wants to be in a market but currently is not. You are a the Last Great Hope for the acquiring company to get in the ring and start slugging it out.

The pitch deck for this type of acquirer will emphasize the growth potential, but also how easy it will be to step in and manage the business. It will also emphasize where the acquiring company can add value, such as through better distribution, supply chain, etc.

This pitch deck will emphasize the competency of the business: the proper key performance indicators, strong messaging that resonates with the customers, and financial growth. Not only does the deck need to show that you have de-risked the investment, you need to show that the company (minus, of course, the founders) and be assimilated into the bigger company.

You need a bidding war.

The astronomical price that big companies pay to acquire occur only when there is a bidding war. If you can position yourself between two or more potential acquirers, you have a good shot at a big payday.

That means that your product (the company) needs to appeal to several different customers (acquirers) at the same time. Each acquirer might have a different reason for the acquisition, so your conversation with one company might be much different than the conversation with another.

In the end, you need to design your company for acquisition. Think about how your company is positioned in the market, but also take care of the back end. Present your company in a professional way, from the brochures to the cleanliness of the warehouse, always thinking about how a team from the acquiring company will view you and your company.