17 Feb Don’t Rely on Speculation
We’ve spoken in the past on specifics for obtaining a premium for your business when it comes time to sell. When this happens, business owners should count themselves lucky. Some owners may argue, “my business was worth a premium because I inputted the ‘know-how’ to make it so.” Perhaps, but obtaining a premium price from a large and influential buyer is something that does not come around very often. In fact, there are generally only a couple of reasons why a business would pay more for your company than the discounted cash flows or financial statements suggest: they are speculating. And when you start discussing with your M&A advisor what your company is worth, be practical. Do not count on speculation from buyers when selling your company.
In software M&A examples abound of large multiples being used to calculate the sale price of a company. The largest technology giants, such as Microsoft and Google, often pay top dollar for fledgling start-ups whose potential outweighs the large premium which is paid. In fact, there are some examples where large software giants paid a premium because the company needed to be acquired for strategy reasons—to keep the competition from buying first. If your business is lucky enough to be the benefactor of such an offering, realize it is more of an anomaly than a regularity.
A specific acquisition by Microsoft illustrates a perfect example of this. The company was called aQuantive—a company which allowed for online advertising which was acquired around the same time Google acquired DoubleClick. Microsoft paid a ridiculous sun for aQuantive: $6 Billion—the most it ever paid for an acquisition in its history. In this case, Microsoft was being strategic. While aQuantive had a good platform and was making revenues, the promise of large growth from aQuantive was obscure. Microsoft had to do something to fight the rise of internet wonder Google. If you do an online search for “aQuantive” and “Microsoft” you will find commentary on how Microsoft has not recouped its money on the acquisition. But perhaps they would have lost more money down the road if a competitor had gobbled them up first. Lucky aQuantive found themselves in the middle of a strategic play at an extremely good time.
Betting on strategic play by the competition is unlikely. Extracting more value than your company may be worth is often the dream of speculative get-rich-quick fanatics and has nothing to do with solid business and work, which are both key requirements for the fulfillment of the American Dream. Working on the “next killer app” can be exciting because of its eventual promise of a payout, but don’t always count on a 10X multiple when selling your business. When this does happen it is usually a rarity and based on speculation or strategy or both. I am a natural cynic, but who knows perhaps you will be the next “goodwill” write-down on Google’s books. Wouldn’t that be nice.