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When you think of selling your website, who do you think of as the buyer? Is it some stranger you don’t know? Is it a competitor? Is it a large corporation swooping in to acquire your assets? Or does it even matter as long as the deal is solid and the money is green?
Who you envision buying your business can tell you quite a bit about whether you are targeting a strategic sale or a marketplace sale. What strategy you choose will guide you in how you price your business, how you approach the sale of your business, what information you gather, what information you present to buyers, and what potential risks you face in your sale.
The Difference Between a Marketplace Sale vs. a Strategic Sale
The primary difference between a marketplace sale and a strategic sale is the motivation of the buyer.
In a Marketplace Sale
A buyer is looking to acquire a business purely for its strength as a business. The buyer is mostly agnostic to the niche of the business and often even the style of the business. What they are interested in is whether the business has strong fundamentals that match up with their buying criteria.
In a marketplace acquisition, the most important metric that buyers will gauge is the earnings of your business. All the other factors (growth potential, barriers to entry, uniqueness of technology, etc) will be viewed in light of the earnings: will the earnings grow, are they at risk, etc.
In a Strategic Sale
The buying group has some strategic advantage to acquiring your business. Maybe they primarily want your customers, your members, or your email list. They may be a competitor who realizes a benefit of removing your business from the industry. In larger acquisitions an acquiring company may want executive talent and technology that adds on to their core set of services.
Earnings are important in a strategic acquisition, but they often are de-emphasized in favor of other metrics which take on a different meaning when the strategic acquirer buys your business.
Examples Of Strategic Acquisitions
To better understand the difference between these two types of acquisitions, it may be helpful to look at a few examples of strategic acquisitions.
When Yahoo! Bought Tumblr
In 2013, Yahoo acquired the quickly growing Tumblr for $1.1 billion making Tumblr’s founder, David Karp, a very rich young businessman. Marissa Meyer, Yahoo!’s CEO and the driving force behind the acquisition, explained in a blog post (on Tumblr, naturally) why she bought Tumblr:
Tumblr has built an amazing place to follow the world’s creators. From art to architecture, fashion to food, Tumblr hosts 105 million different blogs. With more than 300 million monthly unique visitors and 120,000 signups every day, Tumblr is one of the fastest-growing media networks in the world. Tumblr sees 900 posts per second (!) and 24 billion minutes spent onsite each month. On mobile, more than half of Tumblr’s users are using the mobile app, and those users do an average of 7 sessions per day. Tumblr’s tremendous popularity and engagement among creators, curators and audiences of all ages brings a significant new community of users to the Yahoo! network. The combination of Tumblr+Yahoo! could grow Yahoo!’s audience by 50% to more than a billion monthly visitors, and could grow traffic by approximately 20%.
Marissa’s motivation for acquiring Tumblr was its audience (300 million monthly unique visitors), massive generation of content (900 posts per second!), and its user engagement (24 billion minutes spent onsite each month). Did you notice what she did not mention? Revenue.
At the time of the acquisition, Tumblr’s annual revenues were just $14 million. So why did Marissa Mayer pull the trigger? Again, from her blog:
In terms of working together, Tumblr can deploy Yahoo!’s personalization technology and search infrastructure to help its users discover creators, bloggers, and content they’ll love. In turn, Tumblr brings 50 billion blog posts (and 75 million more arriving each day) to Yahoo!’s media network and search experiences. The two companies will also work together to create advertising opportunities that are seamless and enhance user experience.
All acquisitions, whether strategic or market based are done with an eye towards a return on the investment. Mayer saw a potential synergy and opportunity to blend together what Yahoo had already built in terms of personalization technology and search infrastructure (as well as ad network) with the huge audience of Tumblr.
A More Common Example of a Strategic Acquisition
The acquisition of businesses like Tumblr make the news because they are unusual and rare. Among analysts, the acquisition of Tumblr represents a huge risk for Yahoo, or as Tero Kuitten put it, it makes Mayer look like she is a “riverboat gambler”. Most strategic acquisitions are more mundane and straightforward than this.
We had the opportunity recently to work with a leading Forex information site that was quite effective at pushing leads to Forex brokers. Rather than just go for a marketplace sale, we chose to approach individual Forex brokers to see if they would have interest in directly acquiring the website.
Although we included the financial history of our client, we focused more on the leads they generated on a monthly basis. For the target buyers, the financials are not as important since the revenue numbers would change once they acquired the business. As an affiliate model, each client represented a one time commission for our client. However, as a direct broker, each client represents an ongoing revenue stream with a significantly higher lifetime value.
Remember, all acquisitions are made with an eye towards potential return on investment. For buyer’s of this Forex website, their return was calculated on the value of the leads rather than the existing business model.
What About Market-Based Acquisitions?
Strategic acquisitions are usually what we hear about in the news. They tend to be higher profile acquisitions, or, in the case of Yahoo!, considered highly risky which spurs analysis from every corner of the business world. But the vast majority of business acquisitions are not strategic acquisitions, they are market based acquisitions.
The typical market based acquisition happens when a person decides to exit their company, places their company for sale either through a broker or through a listing service such as BizBuySell, and buyers place bids on those companies. In a market-based acquisition, buyers are still looking for a return on investment, but their goal is to keep the business model mostly in tact. They are making an investment in an existing business model and set of systems that produces proven revenue and profits.
Because of this, buyers tend to place a premium on the existing financials of the business. Rather than calculate the value of leads or customers, they measure how well the business is able to monetize existing clients and traffic.
Many sellers recoil slightly when the see the heavy emphasis on financials. They wonder why buyers are not placing value on the other elements of their business: the infrastructure, the software, the customers, the domain name, the vendor relationships, etc.
What these sellers are not seeing is that these other elements are being valued, but they are valued within the light of the existing earnings, the risks to those existing earnings, and the potential to grow those earnings.
So Which Is Better, Strategic Or Market?
All of this begs the question – which type of sale should you target?
The answer, not surprisingly, depends largely on your personal goals and also the state of your business. However, the vast majority of business owners are better served by pursuing market based sales.
While strategic sales are known for their potential to generate a significantly higher level of return for your business (hello, Tumblr!), this isn’t always so. In fact, the first business we sold at Quiet Light Brokerage was situated in an industry that was rampant with strategic acquisitions. However, by pursuing a market-based acquisition we were able to generate 50% more proceeds from the sale than we would have through a strategic sale.
But beyond price, the biggest problem with strategic sales is that they are incredibly low-probability sales. In a market based acquisition a seller has literally hundreds of potential buyers. In a strategic sale, they typically have less than a dozen potential acquirers. In addition, buyers in a strategic acquisition are often not in the position to make an acquisition which puts the seller at the mercy of their existing budget.
This doesn’t mean, however, that you should dismiss strategic sales entirely. At Quiet Light, we often pursue both paths in an effort to get the best return possible for our clients. For businesses who have great infrastructure, yet little to no monetization, pursuing a strategic sale often makes sense.
Ultimately Everything Points To ROI
Whether your choose to pursue a strategic sale or a market based sale, understand this key principle – acquisitions always point to a return on investment. Acquiring companies are not engaging in philanthropy when they make an acquisition. It is possible that Yahoo made a colossally bad investment in acquiring Tumblr, but they still did so with the hope that they will be able to monetize a Tumblr’s huge audience.
When preparing your business for sale, whether you choose to pursue the more difficult strategic sale, or whether a market based sale is better for you (as it is for most businesses), remember to always speak to the return on investment. That is, ultimately, why buyers buy.
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