Strategic value is not the same as fair market value, where a “hypothetical” buyer and seller have access to all relevant data. Strategic value includes synergies and special features, usually hidden, that give the buyer a quicker, less costly and lower risk way to meet goals.
Another reason a well designed and executed exit strategy can increase the business valuation by 50% or more when you sell a business is the ‘strategic value’. The only reason any company buys another company is because they believe:
- they can increase the value of the company being acquired, and/or
- the acquired company will increase the value of their company.
Different prospective acquirers will have different elements in their businesses which will allow them to increase this strategic value. The most successful company sales are where the combination of the two businesses increases the total business valuation faster than either company could do alone. In other words, that old cliché when 1 + 1 = 3.
A partial list of strategic assets includes the following
- Market strength in a geographical area where the strategic buyer is weak or absent;
- Product offerings that complement those of the strategic buyer and, therefore, create the potential for profitable cross-selling;
- Service offerings, such as field technical support, that can make the strategic buyer’s product offerings more appealing and competitive;
- Market strength in a niche that the strategic buyer has been unable to penetrate;
- Key customers that the strategic buyer covets;
- Marketing channel, such as a unique or especially productive distribution network, that can present the strategic buyer’s products and services to an entirely new class of customers;
- Strategic alliance(s) and/or joint venture(s) that are transferable to the buyer;
- Potential acquisition hub, especially if the seller has an outstanding reputation in its industry;
- Technology/technologists that can help make the strategic buyer more productive;
Fundamentally, strategic acquisitions should seek to drive revenue through the combination of businesses and leveraging the scalability of the acquired asset or capability; the profitability of the target firm is not important.