The companies that demand the highest acquisition prices not only address crucial business needs, but also have products or technologies that serve as lynchpins to broader and highly lucrative business strategies or supply chain functions. Many internet of things innovations fit into this category, as they help companies not just complete a single operational task but improve supply chain efficiency and customer relationships more broadly.
These companies also build strong relationships with potential buyers and add value to the business functions of these larger companies. An executive must start early to build these relationships to ensure the company’s technology becomes an integral piece of larger organizations’ operations and major projects.
However, a CEO shouldn’t fixate on one potential buyer and build solutions designed only for that company. This boom or bust approach is risky and limits the company’s M&A options. Ideally, a company would develop a product that is important for and applicable to several large companies, which would help drive M&A competition and increase offer prices. Multiple relationships could also allow a company to fully showcase its technology’s value and capabilities and become the industry standard, which can pay additional dividends.
“ a CEO shouldn’t fixate on one potential buyer and build solutions designed only for that company.”
Know the competition
An acquisition-minded CEO must constantly monitor industry trends and competitors to fully understand potential acquirers’ “best alternative to a negotiated agreement” – in other words, the alternative to buying the CEO’s company. For example, could a potential acquirer develop a replacement technology in-house? Or could it buy a competitor’s cheaper technology with limited interruption to business processes and generate similar results? If so, the CEO may need to recalibrate acquisition expectations or rethink the company’s product offerings.
A CEO who engages in this exercise can determine the true level of competition in the market and have an accurate understanding of the appetite for the company and a realistic sense of the leverage (or lack of leverage) it will have in an acquisition negotiation.
Don’t sell alone
From day one, a company needs a strong team of advisers to ensure compliance with regulations, protect intellectual property and advance its technology. This team plays a crucial role when it’s time to consider acquisition offers. But a company also needs several key new team members during the deal-making stage.
An investment banker is a crucial front-line operator during the acquisition process who can generate and manage competing offers. A company also needs an attorney who specializes exclusively in transactions, which can be highly complex from a legal perspective. A company should also retain expert tax advisers who can help guide the eventual structure of the transaction to minimize the tax impact on the company’s owners.
Keep the end in mind
A company often represents an owner-CEO’s financial livelihood and, in many cases, a large part of the future financial security for the next generation of family members. So, the stakes couldn’t be higher in an acquisition negotiation. Still, many CEOs who spend significant amounts of time engineering their products fail to adequately prepare for an eventual exit, which puts them at risk of accepting bad early offers (no company opens negotiations with its best offer) and limiting the financial returns on their businesses.
A CEO must keep the end in mind from the beginning of a company’s life and develop a comprehensive and strategic approach to not only core business functions like product and business development and investor relations, but also M&A. By adopting this future-oriented approach, a CEO can build the necessary relationships with potential acquirers, understand the market for the company’s products, and establish the proper team to handle acquisition negotiations.
The CEOs who do this will avoid common pitfalls and put themselves in position to maximize the returns on their companies and innovative technology.