What makes your company a “strategic acquisition” for a bigger company?  If you can answer this question, the stage is set for a business exit at high multiples. An illustration of this principle is found in the acquisition of shares in Stratton Finance by carsales.com.au.

Carsales is an online car advertising group in Australia.  It paid $60.1m for a 50.1% stake in car finance broker Stratton.  The investment thesis that Carsales seems to be following here is something like this:

• Consumers come to our online portal to buy cars.  Once they have found a car, they want to know if they can afford to buy it. In the US cars are all advertised as ‘$ per month.’ 
• The problem for consumers in Australia is that cars are advertised as ‘$ total price.’ So how does a consumer in Australia know if they can afford it out of their monthly salary? 
• The solution is to provide a search feature by monthly repayment.  Acquiring a finance company would turn this new feature into a profit stream.  Therefore buy into a finance broker.

This investment thesis turns the acquisition of an interest in Stratton into more of a strategic acquisition rather than a simple financial acquisition.

So how does this help you sell your own business?  Well, the first thing to note is that a business exit can be staged.  You don’t have to sell 100% in one tranche.  The next thing to note is that there are usually just two types of buyers:

• A ‘financial’ buyer, or
• A ‘strategic’ buyer.

The sale preparation, the sale process and the sale price all very different depending on which of these buyers of these you are aiming at.

Financial Buyers

When looking to sell to a financial buyer, you need to aim at potential purchasers that have the capacity to grow the business and to manage it at the operational level.  Examples of such buyers are retired executives from your industry, private equity firms or other acquisitive businesses interested in “rolling up” a competitor.

Financial buyers rarely pay more than the market price and are very interested in the profitability and future prospects of the business.

Strategic Buyers

When looking to sell to a strategic buyer, however, you need to aim at potential purchasers that need what you have.  This might be an icon brand with a long provenance, a dominance in a particular niche, special intellectual property or long term contracts with blue chip clients.  To sell to a strategic buyer, it is essential that your business can be characterised as unique, difficult to copy, hard to acquire, or prohibitively expensive to reproduce. It is the integration of such a business into the purchaser’s existing operation that provides a strategic leap forward for the purchaser.  This justifies the purchaser paying a much higher purchase price than the simple market price.

Importantly, a strategic buyer is usually less concerned with profitability than a financial buyer is.  Thus, if a business is not achieving reasonable EBIT, it is possible that some or all of the business assets might nevertheless be attractive to a strategic buyer.

In the case of Carsales, the clue is the observation that “it is the integration of such a business into the purchaser’s existing operation that provides a strategic leap forward for the purchaser.”  Integrating Stratton into Carsales existing offering gives Carsales a powerful new feature (search by monthly affordability) that has been proven in other markets (the US and Canada) that is missing in the acquirer’s market (Australia).

From the seller’s point of view, having Carsales on the register means that when it comes time to do a full exit, there is already a “Most Probable Buyer” that has an intimate understanding of the business through its 50.1% shareholding.

Understanding the difference between a financial buyer and a strategic buyer sets the stage for a business exit at high multiples.  Analysing your business and identifying strategic value before embarking on the sale process is the key.