I start the conversation about buyouts through a broader discussion of succession planning for every startup I’m involved with. If succession planning is a new concept, here’s a great PDF to get you started or shoot me an email for a deep dive. Sometimes the succession plan for executive leadership involves selling the business rather than handing it over to the next generation of leaders. My last two clients asked me to build a strategy for getting bought out by Google. The first client actually meant Google while the second was using it as a metaphor for a giant company coming in to take over. There’s a formula to building a buyout strategy that I’ll share in this post.
1. When do you want to be bought out?
There’s going to be a huge difference in the potential buyer pool between selling after the first year and selling five to ten years down the road. Knowing this timeframe up front allows for some clarity on all the other decisions. If you’re selling in the first year, you’re likely selling a concept and a prototype. Selling five years or further down the line means a mature product, customer pool, and brand. Both need to be attractive to the target buyers.
My first client has a concept and prototype which Google would love as well as the desire to sell early. My second client wants to sell around ten years from now which is why Google was a metaphor for the larger company. The first client requires a simple set of forward looking statements because seeing a year into the future isn’t too difficult. The second client requires a complex set of forward looking predictions that evolve as the strategy gets closer to the buyout timeframe.
2. What is the buyer pool really buying?
This question is more about what the buyer pool does and is planning to do for revenue than it is about anything else. When I ask most people what Google does, “search company” is in the response. When I asked a close friend inside Google that same question, “Right now, data analytics and marketing. Down the road, so much more.” If you look at the products and services Google provides, the majority for free, they have a pretty simple goal. Gather data and provide advertisers access to customers while they’re making decisions relevant to the advertisers’ products. Knowledge Mapping for search and Augmented Reality for maps are their next one to two year extensions of that model. The first client tucks into Knowledge Mapping perfectly which opens them to many other larger potential buyers other than just Google. Wolfram Alpha (a Siri search partner so by extension Apple), IBM (with Watson, IBM will be a player in search soon), and Facebook (wisdom of friends versus the wisdom of crowds, FB is a search player) among others are all potential suitors.
The second client requires a deeper dive to understand why their value will be the same as my first client’s. They’re building a product in the casino gaming space so most would look at me skeptically when I say Google’s in their buyer pool. To explain the connection without exposing what my second client is working on, I’ll use a parallel from the gaming industry.
Caesar’s Entertainment is in the same business as Google and provides the link between all three; Caesar’s isn’t my second client BTW. An insider at Caesar’s told me a few years ago that they were a data analytics and marketing company that happened to own and operate casinos. Sound familiar? While Google doesn’t care about Caesar’s properties, I’m sure they’re interested in the contents of Caesar’s customer analytics data. Every time a player puts their card into a slot machine, checks into a Caesar’s hotel, eats at a Caesar’s restaurant, or logs into the Caesar’s website, a rich set of data is gathered and stored for mining by Caesar’s marketing group.
My second client is working on something totally unrelated but will be gathering their own rich set of data but, then again, so does everyone with any type of buyer community. How are they positioned to have something interesting to Google? They’ve innovated into a space Google isn’t in but is lucrative enough that Google may one day want to go. Looking at Google’s purchases in the online travel industry gives some insight into what they’re looking for and why they’re entering new these new spaces. Here are some good articles on the recent purchases of ITA and Frommer’s from my background research to support some of my assertions.
At a very basic level it ties back to Knowledge Mapping and these acquisitions in the travel space as well as others to come in different spaces will tuck in and expand their reach. In Casino Gaming, everything is about ten years behind the tech curve due to regulatory oversight so the ten year horizon is just right for my second client. By then the regulations might have caught up enough to make a partnership between a Gaming and Non-Gaming business possible.
This question also enables answers to other important questions:
3. Who are the potential buyers?
4. What’s the potential value? Remember this isn’t what has been invested into the business but what the buyer expects get out of the purchase.
The bottom line answer to the bigger question, what is the buyer pool really buying, is always the same. They’re buying more revenue. Put a different way, the question can be asked, how will buying your business result in more revenue for the buyer pool? This one’s answer is also always the same. It allows them to efficiently enter a new market or expand their presence in a market they’re already in. Who are the potential buyers? Anyone looking to enter or expand in your market. What’s the potential value? A percentage of what they expect to gain in revenue as a result of the acquisition. The more complete the package the higher the percent meaning a prototype and concept get a low percentage while a mature product, customer pool, and brand get a higher percentage.
From all of these questions emerges a buyout strategy. I start with a formatted statement: We’re targeting a buyout in the next “Question 1” year(s), by companies like “Question 3”, for our “Question 2”, for around “Question 4.” The rest is research and supporting documentation.