Selling a company Seth’s Blog

Not like a car company. Most cars on the road will be sold, over and over again, until they end up as parts. Companies usually begin and end with their founders.

Sometimes, a small, stable company is sold to a separate operator, usually for a multiple of the expected annual profit. It’s an investment in future cash flow, but it can be draining, because, unlike a car, you can’t take a company for a test drive and they usually require more than periodic tune-ups and charging station visits.

As surprising as it may sound, the used car market is not as efficient or reliable as used cars. The person who wants to buy and operate a used company is rare, and often does not have access to significant capital.

The company sales we hear about tend to be more strategic, where the buyer believes the purchased company offers synergies (1 + 1 = 3) with their existing business. Perhaps the buyer has a sales force, investment capital, systems or structures that make the combination of companies more successful than either of them alone.

One way to look at this is to think about the wealth you create. They may include:

  • Patents, software and proprietary systems
  • Equipment, leases, inventory and other measurable assets
  • Brand reputation (including shelf space at retailers)
  • Permit resources (what prospects and customers want to hear from you)
  • Loyal, trained staff

Some of these things are more intangible such as:

  • Reliable, turnkey business model with low drama
  • Network effects, proven and working
  • Forward momentum (the idea that tomorrow is almost here better than yesterday)
  • Competitive threat (most large acquirers find it easier to buy competitors than to compete with them)
  • Story to Investors (Share price increases when company acquisitions are less liquid, acquisitions are free. See Cisco history for details)
  • Defensive reinforcement (when a large company’s competition enters a new field, buying a smaller entrant in that new field is a way to jumpstart the organization’s growth momentum)

Some of these things can be predicted and built with patience. Others are easier to see after the fact, but are more opportunistic than intentional.

The single best indicator of whether a company should be considered for a strategic acquisition is whether its investors and board members have done so before. Because these acquisitions are rarely just rational calculations on a spreadsheet, cultural fit and a shared reality distortion field are often required to create the conditions that put them on the agenda.

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