How To Lure A Giant Like Facebook Into Buying Your Company
A great business is bought, not sold, so, if you look too eager to sell your business, you’ll be negotiating on the back foot and look desperate—a recipe for a bad exit.
But, what if you really want to sell? Maybe you’ve got a new idea for a business you want to start or your health is suffering. Then what?
As with many things in life, the secret may be a simple tweak in your vocabulary. Instead of approaching an acquirer to see if they would be interested in buying your business, approach the same company with an offer to partner with them.
Entering into a partnership discussion with a would-be acquirer is a great way for them to discover your strategic assets, because most partnership discussions start with a summary of each company’s strengths and future objectives. As you reveal your aspirations to one another, a savvy buyer will often realize there is more to be gained from simply buying your business than partnering with it.
Facebook Buys Ozlo
For example, look at how Charles Jolley played the sale of Ozlo, the company he created to make a better digital assistant. The market for digital assistants is booming. Apple has Siri, Amazon has Alexa and the Google Home device now has Google Assistant built right in.
Jolley started Ozlo with the vision of building a better digital assistant. By 2016, he believed Ozlo had technology superior to that of Apple, Amazon or Google. Realizing his technology needed a big company to distribute it, he started to think about potential acquirers. He developed a long list, but instead of approaching them to buy Ozlo, he suggested they consider partnering with him to distribute Ozlo.
He met with many of the brand-name technology companies in Silicon Valley, including Facebook, which wanted a better digital assistant embedded within its messaging platform. They took a meeting with Jolley under the guise of a potential partnership, but the conversation quickly moved from “partnering with” to “acquiring” Ozlo.
Jolley then approached his other potential partners indicating his conversations with Facebook had moved in a different direction and that he would be entering acquisition talks with Facebook. Hearing Facebook wanted the technology for themselves, some of Jolley’s other potential “partners” also joined the bidding war to acquire Ozlo.
After a competitive process, Facebook offered Jolley a deal he couldn’t refuse, and they closed on a deal in July 2017. Jolley got the deal he wanted in part because he was negotiating from the position of a strong potential partner, rather than a desperate owner just looking to sell.
Are you setting yourself up so you can negotiate from a position of strength?
After an ill-fated expansion plan, Max Mabuti’s Flat- Foot Engineering faced insolvency. Mabuti turned to a Certified Value Builder, and within one year of leveraging The Value Builder System, Mabuti had stabilized the business and grown its top line by more than 30%.
How do you avoid not being disappointed with the money you make from the sale of your company?
Perhaps you’ve heard that companies like yours trade using an industry rule of thumb or that companies of your size sell within a specific range, and you want to get at least what your peers have received.
While these metrics can be useful for tax planning or working out a messy divorce, they may not be the best ways to value your company.
The Only Valuation Technique That Really Matters
In reality, the only valuation technique that will ensure you are happy with your exit is for you to place your own value on your business. What’s it worth to you to keep it? What is all your sweat equity worth? Only when you’re clear on that will you ensure your satisfaction with the sale of your business.
Take Hank Goddard as an example. He started a software company called Mainspring Healthcare Solutions back in 2007. They provided a way for hospitals to keep track of their equipment and evolved into a slick application that hospital workers used to order supplies.
Goddard and his partner started the business by asking some friends and family to invest. The business grew, but there were challenges along the way: Goddard had to fire his entire management team in the early days, product issues needed to be solved and operational issues needed to be resolved.
At times, it was a grind, so when it came time to sell in 2016, Goddard reasoned that he had invested more than half of his career in Mainspring and he wanted to get paid for his life’s work. He also wanted to ensure his original investors got a decent return on their money.
He was approached by Accruent, a company in the same industry, who made Goddard and his partners an offer of one times revenue. Accruent had recently acquired one of Goddard’s competitors for a similar value, so presumably thought this was a fair offer.
Goddard brushed it off as completely unworkable. Goddard had decided he wanted five times revenue for his business. Even for a growing software company, five times revenue was a stretch, but Goddard stuck to his guns. That’s what it was worth to him to sell.
A year after they first approached Goddard, Accruent came back with an offer of two times revenue and, again, Goddard demurred.
Mainspring had developed a new application that was quickly gaining traction and he knew how hard it was to sell to the hospitals he already counted as customers.
He told Accruent his number was five times revenue in cash.
Eventually Goddard got his number.
Being clear on what your number is before going into a negotiation to sell your business can be helpful when emotions start to take over. Rather than rely on industry benchmarks, the best way to ensure you’re not disappointed with the sale of your business is to decide up front what it’s worth to you.
In the last week of October 2017, The Automatic Customer: Creating A Subscription Business In Any Industry was ranked one of the Top 5 Business Books by Fortune Magazine. In celebration of this, we have created the white paper The Automatic Customer: 9 Subscription Models Any Business Can Adopt. From this white paper, you will learn how all kinds of companies are leveraging the predictable cash flow of a recurring revenue engine. Perhaps you can find a way to adapt one of these strategies to your business. You’ll increase the value of your business and improve your cash flow.
Did you see the news that Facebook acquired messaging service WhatsApp for $19 billion? At the time it represented the largest-ever acquisition of an Internet company in history.
WhatsApp is a pearl for sure. The messaging service allows users to avoid text-messaging charges by moving texts across the Internet instead of the mobile phone carrier networks. This can save people who travel, or who live in emerging markets, hundreds of dollars a year, which is why WhatsApp is adding one million new users per day.
At the time of the acquisition in February 2014, WhatsApp had acquired some 450 million users. Their business model is to charge a subscription of $1 per year after their first full year of service. Even if all 450 million WhatsApp users were already paying, that is still less than half a billion in revenue. Why would Facebook acquire WhatsApp for a number that is somewhere north of 40 times revenue?
Nobody knows for sure what is in Mark Zuckerberg’s head, but we can only assume that at least part of the opportunity Facebook sees is the opportunity to sell more Facebook ads because of the information they glean from WhatsApp users. Global advertising giant Publicis estimates 2013 online advertising spending in the US alone to be around $500 billion. Presumably, Facebook believes they can get a larger chunk of the global online ad buy because they know more about its users by owning WhatsApp. Secondly, without WhatsApp, Facebook’s international situation would look a lot dicier. And if a competitor like Google acquired it instead, it could have been disastrous. Instead, Facebook possesses the most popular messaging app and has neutralized the biggest threat to its global domination of social networking.
And therein lies the definition of a strategic acquisition. Most acquisitions run a predictable pattern of industry norms, but a strategic can pay a significant premium for your business because they are looking at your business for what it is worth in their hands. Rather than forecasting out your future profits and estimating what that cash is worth in today’s dollars, a strategic is calculating the economic benefit of grafting your business onto theirs.
There can be many strategic reasons why a big company might want to buy yours. Here are a few to consider:
To control their supply chain
In 2011, Starbucks announced it had acquired Evolution Fresh, one of their providers of juice drinks, for $30 million. Now Starbucks is no longer beholden to one of its suppliers.
To give their sales people something else in their briefcase
Also in 2011, AOL announced the acquisition of The Huffington Post for $315 million, even though HuffPo had just turned its first modest profit on paper. AOL wanted to give its advertising sales people more inventory to sell and HuffPo had 26 million unique visitors a month.
To make their cash cow product look sexier
Microsoft bought Skype for $8.5 billion dollars even though Skype was losing money. The good folks in Redmond must have assumed they could sell more Windows, Office and Xbox by integrating Skype into everything they already sell.
To enter a new geographic market
Herman Miller paid $50 million to acquire China’s POSH Office Systems in order to get a beachhead into the world’s fastest growing market for office furniture.
To get a hold of your employees
Facebook reportedly acquired Internet start-up Hot Potato for $10 million, largely to get hold of the talented developers working at the company.
Most acquisitions are done for rational reasons where an acquirer agrees to pay today for the rights to your future stream of cash. You may, however, be able to get a significant premium for your company if you can figure out how much it is worth in someone else’s hands.
Four ways to protect your business against competition
Warren Buffett famously invests in businesses that have what he calls a protective “moat” around them – one that inoculates them from competition and allows them to control their pricing.
Big companies lock out their competitors by out-slugging them in capital infrastructure investments, but smaller businesses have to be smarter about how they defend their turf. Here are four ways to deepen and widen the protective moat around your business:
Is there a certification program that you could take to differentiate your business? A Canadian company that disposes of radioactive waste decided to get licensed by the Canadian Nuclear Safety Commission. It was a lot of paperwork and training, but the certification process acts as a barrier against other people jumping into the market and competing.
Is there a certification you could get that would make it more difficult for others to compete with you?
Create an army of defenders
Ecstatic customers act as defenders against other competitors entering your market, a factor that has enabled companies like Trader Joe’s to defend their market share in the bourgeois bohemian (bobo) market, despite a crowded market of stores hawking groceries
Get your customers to integrate
Is there a way you can get your customers to integrate your product or service into their operations?
The basic switching costs of Customer Relationship Management (CRM) software are virtually nil. Everyone from 37signals to Salesforce.com will give you a free trial to test their wares.
The real expenses associated with changing CRM software only come when a business starts to customize the software and integrate it into the way they work. Once a sales manager has trained his salespeople in creating a weekly sales funnel in a CRM platform, try to convince him to switch software.
Can you offer your customers training in how to use what you sell to make your company stickier?
Become a verb
Think back to the last time you looked for a recipe. You probably “Googled” it. Part of Google’s competitive shield is that the company name has become a verb. Now every time someone refers to searching for something online, it reinforces the competitive position of a single company.
Is there a way you could control the vocabulary people use to refer to your category or speciality?
Widening your protective moat triggers a virtuous cycle: differentiation leads to having control over your pricing, which allows for healthier margins, which in turn lead to greater profitability and the cash to further differentiate your offering.
9 Warning Signs You’re a Hub-and-Spoke Owner (and why that’s a problem)!
If you were to draw a picture that visually represents your role in your business, what would it look like? Are you at the top of a traditional Christmas-tree-like organisational chart, or are you stuck in the middle of your business, like a hub in a bicycle wheel?
As anyone who has tried to fly United when O’Hare has been hit by a snowstorm knows, a hub-and-spoke model is only as strong as the hub. The moment the hub is overwhelmed, the entire system fails. Acquirers generally avoid hub-and-spoke managed businesses because they understand the dangers of buying a company too dependent on the owner. Here’s a list of nine warning signs you’re a hub-and-spoke owner and some suggestions for pulling yourself out of the middle of your business:
1. You sign all of the checks
Most business owners sign the checks, but what happens if you’re away for a couple of days and an important supplier needs to be paid? Consider giving an employee signing authority for checks up to an amount you’re comfortable with, and then change the mailing address on your bank statements so they are mailed to your home (not the office). That way, you can review all signed checks and make sure the privilege isn’t being abused.
2. Your mobile phone bill is over $200 a month
If your employees are out of their depth a lot, it will show up in your mobile phone bill because staff will be calling you to coach them through problems. Ask yourself if you’re hiring too many junior employees. Sometimes people with a couple of years of industry experience will be a lot more self-sufficient and only slightly more expensive than the greenhorns. Also consider getting a virtual assistant (VA), who can act as a first line of defense in protecting your time.
3. Your revenue is flat when compared to last year’s
Flat revenue from one year to the next can be a sign you are a hub in a hub-and-spoke model. Like forcing water through a hose, you have only so much capacity. No matter how efficient you are, every business that is too dependant on its owner reaches capacity at some point. Consider narrowing your product and service line by eliminating technically complex offers that require your personal involvement, and instead focus on selling fewer things to more people.
4. Your vacations suck
If you spend your vacations dispatching orders from your mobile, it’s time to cut the tether. Start by taking one day off and seeing how your company does without you. Build systems for failure points. Work up to a point where you can take a few weeks off without affecting your business.
5. You spend more time negotiating than a union boss
If you find yourself constantly having to get involved in approving discount requests from your customers, you are a hub. Consider giving front-line, customer-facing employees a band within which they have your approval to negotiate. You may also want to tie salespeople’s bonuses to gross margin for sales they generate so you’re rewarding their contribution to profit, not just chasing skinny margin deals.
6. You close up every night
If you’re the only one who knows the close-up routine in your business (count the cash, lock the doors, set the alarm), then you are very much a hub. Write an employee manual of basic procedures (close-up routine, e-mail footer to use, voice mail protocol) for your business and give it to new employees on their first day on the job.
7. You know all of your customers by their first name
It’s good to have the pulse of your market, but knowing every single customer by their first name can be a sign that you’re relying too heavily on your personal relationships being the glue that holds your business together. Consider replacing yourself as a rainmaker by hiring a sales team, and as inefficient as it seems, have a trusted employee shadow you when you meet customers so over time your customers get used to dealing with someone else.
8. You get the tickets
Suppliers’ wooing you by sending you free tickets to sports events can be a sign that they see you as the key decision maker in your business for their offering. If you are the key contact for any of your suppliers, you will find yourself in the hub of your business when it comes time to negotiate terms. Consider appointing one of your trusted employees as the key contact for a major supplier and give that employee spending authority up to a limit you’re comfortable with.
9. You get cc’d on more than five e-mails a day
Employees, customers and suppliers constantly cc’ing you on e-mails can be a sign that they are looking for your tacit approval or that you have not made clear when you want to be involved in their work. Start by asking your employees to stop using the cc line in an e-mail; ask them to add you to the “to” line if you really must be made aware of something – and only if they need a specific action from you.
If three or more of these warning signs apply to you, perhaps it is time to take a different approach to your business. If this was a bumper sticker it would say, “it is time to work ON your business and not IN your business.” If you’re wondering how to get started, you might like to give me a call…
One of my mentors is Keith Cunningham. You can find out more here: www.keystothevault.com. Take any or all of his courses, they're great. As a bit of evidence, here is his latest blog post. It is so good, I wanted to share it with you.
If you will do these three things on a regular (daily) basis for 90 days, you will be stunned at the progress you will achieve.
#1. Read and write your major outcomes daily. You will notice I did not use the word “goals”. In our culture, “goals” have become synonymous with a wish. People say, “I wish I weighed 10 pounds less…. Oh, I think I’ll make that my new goal.” I do not think we need to get better at goal setting…. I think we need to get better at setting higher standards. Reading and writing your outcomes daily focuses your mind on the most critical things that need to be achieved.
#2. Plan your day before it starts. This simply means you sit down with your calendar and think about the most critical action items you must knock out today. Progress is not built by doing something huge, but rather by consistently doing ordinary things. Progress is not based on the size of your “To Do” list, but rather by what you prioritise and put on your calendar.
#3. Accountability. Here is the truth: Our brains are simply too powerful at making excuses and creating elaborate justifications for why we did not get something important done or followed through on. We make promises to ourselves, but we break them with alarming regularity. For some reason, promises we make to ourselves are less sacred than promises we make to others. Having an accountability partner who will hold you to the promises and commitments that you make is critical to making sustainable progress…. Someone who will tell you the truth and not buy into your cheap excuses for why you fell off the wagon.
Here it is on a bumper sticker: The higher you go or the higher you want to go, the greater the requirement to have someone in your life who will hold you accountable and tell you the truth.
Thinking Time: Could I find an extra 5 minutes every morning, before I turn on my computer, to read and write my major outcomes and plan my day before it starts? Could I structure in 45-60 minutes of calendar time every day to work on my major objectives for the year and thereby kick the can on a daily basis? Who have I given permission to tell me the truth and hold me accountable? Am I ready to play this game to win or do I want to just keep dabbling… hoping to get lucky?
If your company’s revenue has stalled after a period of rapid growth, you may have fallen into The Mile Wide Trap.
Consider the case of Kim (not her real name) who runs a public relations firm. Kim studied marketing at school and went on to work for a big advertising agency where she spent ten years learning a variety of marketing disciplines, from public relations to advertising to direct marketing and social media.
Then Kim decided to leave her job to start a public relations firm. Given her depth of experience and connections, she quickly landed tractor giant John Deere as a client and was asked to handle their regional dealer events. She hired some helpers and her start-up agency quickly began to grow. Kim did a great job with the dealer events, so John Deere asked her to handle their annual sales conference. Again she delivered with style and creativity.
Impressed by Kim’s innovative approach to the event, John Deere asked her to handle some of the creative for their next advertising campaign. Kim had started her company to do PR, not advertising, but John Deere was a great client so she agreed to help out with the ads.
Then John Deere asked her to take a look at their website. Kim’s new employees had no experience with web design, but Kim had done some website jobs back at the ad agency. Not wanting to disappoint John Deere, Kim started to personally handle projects that her employees didn’t have the ability to execute.
Kim didn’t worry about new business development for her own firm because the more John Deere asked Kim to do, the busier – and more profitable – her firm became.
Then one day Kim looked at her monthly P&L statement and realised that, for the first time, their sales were flat on a month-over-month basis. The next month it happened again and then again. Kim had run out of hours in the day to sell – she had inadvertently fallen into The Mile Wide Trap.
The Mile Wide Trap
The Mile Wide Trap ensnares you when you do an excellent job serving a small number of great customers and they ask you to handle more of their work. You keep delivering, and they keep broadening the list of products and services they want you to supply.
Your company is wildly profitable serving the expanding needs of this small list of “great customers” so you keep falling deeper and deeper into the trap.
Pretty soon, you’re an inch deep and a mile wide in offerings and the only person in your company with the depth of industry experience to deliver all of the services is you. But you’re trapped because your expenses have crept up as your revenue has exploded – leaving you dependent on the sales you get from a small group of demanding customers.
With no more hours in the day, your company stalls and you run on a hamster wheel just trying to keep what you’ve got.
The Solution: Sell less stuff to more people.
Instead of selling more things to a few customers, concentrate on selling a few things to a lot of customers.
Nashville-based Ethos3 is a successful design firm that has avoided The Mile Wide Trap. Most design firms are founded by a designer who gets himself in trouble by offering a broad range of design services (brochures, websites, signage, advertising) to a handful of clients. But founder knew that in order to scale up beyond himself, he needed his employees to execute the work, and therefore he decided to focus on one very small corner of the design business: PowerPoint presentations.
Schwertly’s focus on PowerPoint has allowed him to train his employees to follow his system for designing presentations. Everything is standardised – from the proposal to project management to the final invoice – so employees can follow a system that doesn’t require Schwertly. Ethos3 has scaled up nicely and counts Microsoft, Google and Cisco among its 300+ customers.
Another example: Flikli.com is a video production studio, but instead of making videos of all kinds, they’ve decided to focus exclusively on two-minute animated “explainer” videos that explain a company’s value proposition simply and effectively. Their focus on creating one specific type of product allows them to standardise their pricing and give employees a step-by-step guide to making great explainer videos. Flikli has scaled up to 22 employees and their work has been featured in everything from Wired Magazine to The Washington Post.
One more example is Denver-based Leprino Foods. They supply mozzarella for Pizza Hut, Domino’s, Papa John’s, and Little Caesars, dominating as much as 85% of the pizza cheese market with $3B in annual revenue. In 1958, after closing his father’s boutique grocery store, James (who owns 100% of Leprino) noticed the rising popularity of pizza joints and decided to go headfirst into mozzarella delivery. He then rode the popularity of Pizza Hut to scale, gained manufacturing patents and earned a 7% net margin for his business — essentially creating a dairy-filled moat between him and smaller competitors.
You can fall into The Mile Wide Trap innocently enough: you do great work and a customer wants more of you. But it’s a trap that will eventually choke off your growth. The way out is to follow Flikli, Leprino Foods and Ethos3 and focus on selling less stuff to more people.