It can be a bitter pill to swallow for an entrepreneur who has worked hard to build a business they are rightly very proud of, but let’s be honest – if your business isn’t worth more in the hands of a new owner, why sell it? You will only achieve a premium price for your business if the new owner believes they can do more with it than you have achieved.
The sweetener for any owner looking to sell, of course, is that standard methods of valuation are soon overruled by a strong strategic motive for acquisition. Here are 5 recent examples of strategic motives for acquisition – do any of them sound like your business?
1. Filling in the gaps
The recent explosion in cook-at-home meal delivery services like Gusto and Hello Fresh, fuelled by the pandemic, has left traditional food companies with an obvious and gaping hole in their portfolios. This was clearly a strong motive for Nestlé who announced in November 2020 that they had acquired a 16% stake in Freshly, a US-based meal delivery business.
The deal values Freshly at $950m – just over 2.2x turnover. But this valuation was not simply about financials, in the words of Nestlé USA Chairman and CEO Steve Presley “adding them to the portfolio accelerates our ability to capitalize on the new realities in the U.S. food market and further positions Nestlé to win in the future.”
2. Moving with the times
The complex world of technology and computing doesn’t stand still, and no-one understands that better than chip-set manufacturer AMD having grown over the years to provide a credible and, arguably, better alternative to the market originator Intel.
They know they need to stay ahead of the game, a motive which has led them to acquire Xilinx – an innovative designer and manufacturer in the same space. A statement from the companies says the acquisition will allow them to “capitalize on opportunities spanning some of the industry’s most important growth segments, including data centers, gaming, PCs, communications, automotive, industrial, aerospace and defense.”
3. Brand power
One thing SMEs regularly underestimate is the value of their brand and reputation. You might not have the reach to be a global household name, but that doesn’t mean that companies won’t be interested in the meaning your name carries among your clients and in your local area.
EG Group (who also acquired Asda in October 2020) acquired fast-food chain LEON in April 2021 for £100m, despite being loss-making and having its growth plans seriously stunted by the pandemic. So why the valuation? Mohsin Issa and Zuber Issa of EG Group said the deal offered a “fantastic opportunity” to purchase a “brand we have long admired”.
4. Economics of scale
Amazon is everywhere and is one of those fortunate businesses to have been in the right place at the right time during this pandemic. But what can other businesses do when faced with a sprawling giant with the seemingly un-touchable might of a business like Amazon. One way is to acquire scale…
The acquisition of publisher, Simon & Schuster by Penguin Random House is an attempt to combat scale, with scale. The deal, expected to go through in mid-2021, will make Penguin Random House the biggest book publisher in the U.S., responsible for an estimated 1/3rd of all books published in the territory. Few of us will ever be able to challenge this in terms of scale, but the principle applies even when scaled down to the SME level. Could someone gain significant benefits of scale from acquiring your business?
One of the limiting factors to growth commonly experienced by companies is a need to build experience, expertise, and skills into the business. This can be done through development of personnel and recruitment, but it is a slow process. Faster by a long way is to acquire a company that has already built the experience, expertise, and skills you need.
The acquisition of Waste Source by Reconomy in October 2020 was a classic example of this. Reconomy Chief Executive, Paul Cox said, “Waste Source will bring even more expertise, capability and experience into the group as part of that strategy, and we look forward to working with the team.”
If you think your business could be worth more in the hands of a strategic acquirer, or you want to explore your options, we would love to talk to you. As we said in a previous blog, who buys your business matters immensely, so it’s a process that must be skilfully driven. You can get in touch with us to arrange a confidential, no obligation, meeting… or for a more general introduction why not attend one of our free webinars?