High numbers are table stakes. For a more successful strategic event, don’t overlook these four aspects of your business.
Not long ago, I held a conversation with one of the smartest startup founders I know – we’ll call her Emily. Deep into the discussion about paths to exit, Emily referred to the $10M rule. It’s a rule I know well: Once a company hits $10M in EBITDA, the rule goes, the team is ready to court a strategic acquirer. The rule has variations – I’ve heard numbers ranging from $15M all the way up to $30M. But the idea is constant: Hit a magic benchmark that most strategics have in mind, and you’re ready for sale.
The problem with the rule is that it’s simply incorrect, or at least incomplete. To be sure, all things being equal, acquirers feel more confident taking a bet on a company with strong signs of financial health. But thinking in terms of one number alone misunderstands why large companies – from PE firms to enterprise strategics – look to buy smaller ones. A myopic focus on that simple EBITDA may lead companies to a misaligned strategy, a lower valuation – or to being overlooked altogether.
If you’re guiding your exit based on the $10M rule, you’re not alone: As I said, Emily – and many CEOs, CFOs, and other operators like her – are enormously talented leaders, but still are convinced that the $10M rule is an iron-clad law. In reality, strategic acquirers typically look to four different aspects of a startup’s business. To help you plan a more successful exit, I’ll go through all four below.
Your Category
Even if you’re running a truly breakout company, acquirers will look at your business from the lens of category first.
A large reason is risk: Broadly speaking, companies in promising categories are perceived to be safer bets. Since knowledge is the first step to avoiding risk, acquirers also gravitate towards categories they know extremely well – or at least to categories that are adjacent to ones they’re expert in.
Meanwhile, acquirers often look for category players that offer synergies with their existing holdings – and so they’ll rank category as a prime consideration when they’re weighing what they’ll include, and what they won’t include, in their portfolio.
Because of all this, one of your primary goals toward exit is to educate the market not just on your business, but on the ins, outs, and importance of your category as a whole. And because acquirers rely heavily on analysts at firms like Forrester Research and Gartner to make sense of categories, it’s critical that you develop strong relations with and make the case for your category to these same professionals. That’s particularly crucial if, like many startups, your category is new, small, or both.
Your Growth Roadmap
Say a strategic firm acquires you tomorrow. How do they know they’ll see returns? What’s your plan to use their backing to drive a step-change in your business? The answer can’t be anything similar to “We’ll keep doing what we’re doing now,” because transformative growth takes fundamental shifts. To be an attractive acquisition target, you need to have a bold “Phase Two” plan for your organization – especially vertical, channel, and product expansion, all with an eye toward dramatically increasing cash flow.
Laying out your clear post-acquisition agenda will also help you find an acquirer with a shared vision to yours, which can help with getting the number you want and will make for a more successful next phase as a part of a strategic holding.
Your Reputation
Even if your company is currently hitting all its OKRs, there may be risks lurking beneath the surface. To spot these, acquirers will look deeply at your reputation across the market. What do your clients think of you? Prospects? Competitors? Your employees (current and former)? Their perceptions can provide clues as to the “real” story. Plus, your reputation today can directly impact how easy or difficult it will be to earn and win clients, grow the team, and shape the market going forward.
All of this is why acquiring companies will dive deep into your reputation ahead of your sale – and why reputation development must be a critical pillar of your path to exit.
Your Ecosystem
How strong is your ecosystem for executing on your vision? What integrations do you have? What formal partnerships? What does your business development pipeline look like? Acquiring firms will ask these critical questions – examining your arrangements with distribution partners, sales partners, channel partners and more – because often, the most efficient route to your goals is through an ecosystem of allied companies. Conversely, companies that operate as “lone wolves” or “islands” simply don’t have a clear way to grow.
Plus, strategic partners often become strategic investors, and ultimately acquirers – so a more robust partner network means greater chances of a successful exit.
Successfully navigating all these four areas – Category, Roadmap, Reputation, and Ecosystem – takes significant investment in brand reputation, analyst relations, strategic planning, workforce engagement, partnership forming, and much more. All of this is hard work you’ll want to start at least 18 months before a sale.
As you plan, don’t take any specific number too seriously. Instead, focus on the real criteria that buyers think about – so you’ll be better suited to command a healthy multiple of $10M, and more. ◆
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