The Exit Engine Podcast Episode 25: Identifying a Strategic Buyer

Welcome to the ExitEngine Podcast, episode 25. Good morning, John.

Good morning, Joe.

How you doing today, man?

I'm doing great.

Excellent, excellent. Well, you know, we are seeing a, uh, uh, The, uh, remember the movie Empire Strikes Back from Star Wars?

It's funny, I was talking about it this weekend.

Oh really? Interesting. What about it?

We were debating when I was in Virginia, we were debating what the best Star Wars movie was, and that was the one that came up. And my, my nephew, uh, who just turned 21, agreed with me.

So out of all, all the Star Wars movies, that's the— not just the original trilogy, but the whole thing?

Right. And I have to contend to my, my lack of knowledge of the, some of the ones that are the most recent ones, but he's seen all of them and he, he said that Empire Strikes Back was, was number one.

Yeah, I've seen, I've seen all of them too. I, I think that I agree. I think that overall as a movie, as it's, as a total, like as its own thing, it's probably the best film of all of them. No question.

Agreed. Yeah.

Interesting. Well, the other thing that's still The Empire Strikes Back, but, but then 2025, John, Yes. I, I think we're gonna see something else strike back, and that's gonna be strategic buyers.

Now, why is that?

Well, we already know that strategic buyers make up generally more than half of all acquisitions, right? More so, many more so than actual, than financial buyers. Right?

Right.

And the reason is, is because frankly, a, uh, it makes a lot more sense for larger companies to buy mid-market companies for strategic reasons than it is going to be for pure financial reasons, right? In other words, you're not gonna get a single owner buying— rarely you're gonna find a single owner or a single buyer who wants to just buy a $50 million company, right? And the reality is that most of the time it's gonna be larger companies buying smaller companies, right? And so—

Yeah. And maybe we should just take a second to define what we mean, 'cause you contrasted strategic buyers with financial buyers.

Yeah.

Financial buyers, right, are private equity firms and those investment firms who are looking at the company and are buying them for purely financial reasons. Yeah, they may bring in some operational people and strategic people, but they're buying it for a financial return. They're gonna monkey with the debt, they're gonna change things, They're gonna get them access to more capital and help them scale and grow. That's pretty much what the financial buyers. Strategic buyers are people that are in the industry, are doing similar things than the target company, and they are buying either technology or market share or geographic expansion or something so that they can sell either widgets or like adjacent widgets that the company's selling. They can sell those in addition to new clients. So that's essentially what strategic buy is.

So really the 3 big reasons, right? Why does a strategic— why does a company strategically buy another company? Really 3 big reasons, right? One is to be able to get new market share, to be able to get access to a new market, right, that it couldn't get otherwise. The second reason is to be able to actually have, again, more access to potentially niche markets, right? A larger customer base. You might be able to have ancillary products that you put together so that you are, which would make like a bundling situation. But again, that's all kind of market-related. But then, obviously, the other thing is that you might actually be able to be purchasing IP, right? You could be purchasing talent, right? You could be purchasing, when you're buying another company, you could be purchasing operational process, right? So, the reality is, is that from a strategic standpoint, obviously, if you're saying, if I'm a large company, I say, I want to go and I want to get into this market now, and we've done some research, and we see that this particular market of, let's say, women between 45 and 70 is a market that we can't get at. If we do do that, we're going to have to go build an organization to go after that, and that's going to take a long time and potentially cost more money than if we buy one that already exists.

Yep. Exactly.

Right? So the reality is that I'm going to go out, I'm going to start looking at all these different companies in this space, and I'm going to go through the process of the due diligence on the buy side to see who is a good— might be a good target for this. And by the way, most of the time when people are doing this, they are literally just going out. And it may be that you, as a mid-market business owner at home listening to this podcast, have had emails or phone calls from these companies, basically looking to, you know, sniffing around and maybe asking questions about stuff like that. So that may have been— that and private equity firms, conversely, may have been— are probably the 2 basic kind of things you may have had sniffing around your company in terms of looking for acquisitions.

Yep, exactly correct.

So again, the strategic buyer is going to go after something for a strategic reason. I need new market, I need your product, I need your process. Versus a financial buyer, like a PE firm that is going to come after looking for a specific kind of return on a certain amount of time. And so that's the difference. Now, they are all strategic in their nature. So we call them strategic buyers just to separate them from the financial buyer that is, again, more profit-oriented in a shorter-hold situation, whereas a strategic buyer is going to take this company and integrate it into their existing process or existing company, probably, and make it one big company that, that, that just to be able to get them kind of exponential growth quickly, right?

Yes.

Um, so big companies are now, John, in 2025, right? We see the trend right now from all reports is that we're going to see even more strategic buying happening as we move into 2025 and beyond than we have seen even in the past. And, and there are a couple of reasons for that, right? So the first thing is that, is that we are seeing from a, from a, you know, probably from an economic standpoint, we are seeing a situation that is, again, still a little bit uncertain, maybe less uncertain than we thought it would be after the election and things like that. We don't exactly know at this point, as we sit here right now, in January of 2025, exactly what's gonna happen. However, we do know that there is likely going to be more downsizing and more consolidation. And so what that means essentially is that we're going to see potentially a lot more strategic buying happening as companies try to go for, how can I grow in an economy that might be, again, might be down, might be up, may not be, not sure, but it might be, is going to be a better buy or better financial move for me to acquire somebody that already exists, is doing this well, than it is to go and start to try this from scratch.

Yeah, yeah. And like an example would be, and again, I don't want to, you know, get in the prediction game, but like a lot of companies are investing in artificial intelligence and a lot of startups are starting themselves being an artificial intelligence company. And I'm sure everyone else is getting emails and connection requests from all these artificial intelligence companies that can do insert whatever it is, driving cars, all those types of things.

Right.

But I think a lot of opportunity and a lot of companies are either investing a little bit or holding off and seeing, hey, maybe I'll just buy one of these artificial intelligence companies and put it in my organization as opposed to waiting. And there's so much money chasing in from private equity. There's so much money in venture capital chasing the model or the company that figures all this AI AI stuff, I would just look at NVIDIA, right? NVIDIA is the one that really made money, is the only company that's really made money from AI yet. And they're selling the chips, right?

They're the Cisco of the internet, of the artificial intelligence side kind of thing, right?

Yes. Cisco was the one selling picks and shovels back in the day for networking to build the internet.

And I think NVIDIA, if I understand it, is one of those companies that's doing that for the infrastructure to be able to handle all the processing and all that stuff that AI requires.

Exactly. So yeah, I think you're right in the sense of strategic buyers will be on the prowl throughout 2025, especially if the economy suffers or if the economy has a blip or interest rates stay high. There will be opportunities for those big companies that have a lot of cash like Google and Amazon to buy those companies that are succeeding, frankly.

That's right. And look, and Meta and Amazon and Google and all those places, right? They acquire these smaller companies, mid-market companies all the time. Right? This isn't, this isn't new for them. And again, very large companies, right? This is part of kind of what they do on a regular basis, right? But when you're talking about potentially mergers, and we talk about acquisitions a lot on this podcast and in terms of what we do, but the merger is something else I think you're gonna see a lot of in the mid-market space potentially moving forward in 2025. And the reason again for that is, again, it's going to be about consolidation. Right. It's going to be, we are better together than we are, even if we're competitors or we were competitors, that we are going to be better together to weather whatever is next or whatever than it is. Right. And you're going to start to see this stuff happening. You hear about these things happening in the mid-market, in the large market space all the time. Right.

Yeah. And I think with, in general, with the new administration coming in, who's going to be generally friendly to more mergers, I think that's in general true that that Trump will be more friendly to mergers. There's obviously some exceptions, but I wouldn't be surprised if a merger is announced either in the next couple of weeks or right after the inauguration, because people have been probably working on it over the holiday. I wouldn't be surprised if we start seeing consolidation in large industries.

No, exactly right. So again, the point is that what is a— again, why do mid-market companies, why are they appealing to these larger companies and why are they appealing potentially to each other, right?

Yeah.

And so the first swing is obviously growth potential, right? It is much faster to acquire, in theory, it's much faster to acquire a company that already exists, is already doing and operating the thing that you want it to do in connection to your existing business than it is to go out and grow that thing from scratch. I have to go hire the people, I have to have the place, I have to have the space, I have to do whatever. There's a lot of investment there too, but the real difference is speed, right?

Yeah, right, because you are buying revenue in a lot of ways. You're buying the revenue of the other company, right? So to your point, can you go out and hire salespeople? And if you're going to an adjacent market or adjacent product, yes, you can, but sometimes that can take 2, 3 years. Whereas if you do an acquisition, you immediately become, you know, that product line goes into your business, you're supporting it, you're solving, you're selling those, your products or services to those additional customers. And maybe there's some overlap, which makes it easier to do. It's just a much faster process, inorganic growth, as we say.

And especially when you've got, when you're going at, when a company that you, when you're the mid-market company and you are in a, you know, already in an untapped or underserved market, right, for the acquirer. So, you know, the growth potential is the reason I'm going— the reason a big company is going to come after a smaller mid-market company is because one is because you've got a— you have an untapped market. There is something that you are serving that this other company wants, and they're able to basically get it very quickly without having to build it from scratch. Operational strengths, right, is another reason, right? The ability to basically, you know, again, stay Mid-market companies tend to be a little bit more nimble. They can move a little bit faster, and that is obviously very appealing, especially in, in when you're going to new markets and things like that, to be able to be as flexible, as nimble, to be able to adapt quickly. And also from an integration standpoint, it makes it a little bit easier.

Big—

2 big companies. We did a podcast way months ago, I think, about Daimler Chrysler, remember? And that whole fiasco, those 2 giant behemoths trying to actually integrate. Well, it's much easier for a large company to integrate with a mid-market company than it is with another large company, right?

Yeah, because what happens— I mean, you know, having done it, it's, it's one of those things where you buy the smaller company and you look at their, their contracts and you look at their vendors and you look at all the things. It's like, okay, let's roll these— in my case, let's roll these 95 agents off of their platform that they're using onto the one I'm already paying for. And let's, you know, take their— have a couple meetings and see what— whatever. Maybe there's a super vendor that they use. Okay, great. Maybe we can integrate that.

But you—

effectively what we did in most of the acquisitions I've worked on is you cancel those contracts, you roll people onto the platform, you start paying a little bit more to the vendors you're working with for the additional people. But all those contracts go away. All that cost drops to the bottom line. And everyone sort of starts rolling all their stuff on. And again, it's a process like anything else, but that's essentially what happens with— in the acquisitions I've worked on is you learn. And if you're buying them for operational processes, okay, then you have the acquiring people take over and COO of the old company becomes the COO of the new company. And you learn everything you can from that, from what you acquired. And roll them into your operation.

Yeah, no question. And again, and it's much easier to do that integration with a smaller mid-market company than it is to do with a big giant, you know, some other large, you know, very large, you know, supersized, you know, company, right?

Yeah. A merger of equals is never a merger of equals, right? Someone always takes over. AOL Time Warner, Daimler Chrysler, all those, any failed merger, a lot of them are, oh, we're gonna be merged of equals. And the kicker is, oh, we're gonna be co-CEOs. That's another— that's a sign of nightmare coming down the road.

Yeah, exactly.

Which is why strategic buyers— to get back to strategic buyers, that's why it's very clear in a strategic buyer situation, the big fish is gobbling up the little fish.

That's right. And the reality is that, again, as the little fish in this scenario right now, you might be bigger than your competitors, you might be bigger than a lot of other people. But again, compared to the— in most of these paradigms. There's a big fish and a small fish. This small fish is, again, a knowledge expert. Okay, so if you're the CEO, right, of a mid-market company that's going to be attractive to a larger enterprise, you are most likely going to be incredibly— you as the owner are now in a situation where you are going to actually be very Potentially very helpful, right, to the new owners. This is different, right, than it is if you were being bought out by a private equity company, right? Why is it different? Because, well, now we're in a situation where it's like, I really need your knowledge, okay? I don't want you to leave, right? And in fact, I might make an offer, the whole thing that says you now stay on and run this company in perpetuity, or Until whatever, or here's a new 4-year contract, or whatever that stuff is. So, even the negotiation in terms of what you want as the owner starts to come into play here too.

Yeah. The structure of the deal is different, right?

So, yeah. And again, it becomes a— it's a major consideration on your part as the owner, right? Because one is a financial buyer solution is you are exiting and you are going. That's an exit, like done. You're— oh, it's over. Right? Here's some money. Thank you so much for the company you built. You're out of here. Right now, it might take 2 or 3 years to actually earn out or whatever, right? But in a strategic situation, you might have an earn-out clause. You might have the ability to say, hey, look, the point is that you as the owner get to say, this is what I want, right? I don't want to work for you for 5 years, or I'm happy to work with you for whatever thing at And be on the board of directors or on the whatever, right? So the reality is that your negotiation, the things that you can get out of a strategic buying situation are different than the things you're going to potentially get out of a, out of a, out of a, you know, a financial buyer.

Exactly.

And so it's important to understand that stuff as you go into it. But understand that if you have a kind of unique audience, right, if you have an operational efficiency, if you have— because you have a smaller team, because you have subject matter expertise or market expertise, right? Because you have those— Yeah, you could have a strategic client, right, that, right, to a certain degree, you know, a certain talent pool that you have, right, of experts or whatever, right? All these things are potentially, you know, valuable to a larger, you know, a larger player who would like to have this as part of their organization. And so Those are the things that you're looking at. What are the things that I have as the owner of this mid-market company that these strategic buyers are going to want? And again, the process becomes exactly the same as the rest of it, which is now you're going to start looking at the things at your company and what is your company and what's going to make a good deal? What are the things that you want as the owner out of a deal like this? And how can you position this company to prove to whatever strategic buyer That it's going to be a good investment for them to make.

Yeah, and like an example of this would be, let's look at Google, right? Google's a good example of companies. If you think of what they're doing when they bought YouTube, which I think was in 2009, you know, before YouTube was like a morass of nightmarish content and copyrighted material And it was, it was sort of like free-for-all, right? It was, it was a free-for-all place. You could find a ton of stuff on it. But what Google has done is Google's taken YouTube and they've made it sort of incredible, right? They're TV shows. Yeah, they've been— they've made it the business and, and, and they've, they've sort of signed contracts and done the real work to make it, to make YouTube sort of an incredible part of their business. Um, and, and Google's really built on acquisitions too. There's other— there's AdSense and DoubleClick, all those businesses that, that made up— like, Google saw the writing on the wall with ads and with video and said, this is going to be the future of the internet, I want to be there strategically. We could build YouTube, sure, but they didn't, and they, and they bought YouTube and realized just incredible gains from From those, those businesses.

Yeah, I mean, think about what YouTube has now. I mean, YouTube, again, owned by Google, right? But YouTube in and of itself, a giant brand with, you know, with an NFL contract.

Yeah, with NFL contract, right? Like your TV service, like there's a lot— and I don't have this, but a lot of my friends have YouTube TV and that's their TV service. Like, and, and, and 6 years ago, 7 years ago, 8 years ago That was maybe a pipe dream, but it wasn't even in the cards.

Right. And again, maybe it might have been on some strategic roadmap somewhere in a 10-year plan or whatever, right? But again, the— but, but even that— but YouTube couldn't become YouTube probably without Google, right? So the idea that— not saying YouTube couldn't have been something or whatever and we wouldn't have known or been able to compare it. I'm just saying that there's no question that the resources, the everything that Google has now gets applied to YouTube, right? Explosion.

Yeah.

And that's the thing. And so, and the same thing that, you know, just you can make the same case for, you know, the Meta brands and stuff like that, the stuff that Facebook has bought and all that stuff. So the reality is, is that, you know, and there are various levels of successful integration after the fact. So not to be taken lightly is what will the integration be part of? And so when you're sitting there talking, negotiating with, with a potential strategic buyer, You know, one of the big questions you're gonna wanna ask is, what does, what is the, what does the transition look like? What is the integration process? What are the things that, in what we would have to do in order to basically make this, you know, kind of oddly shaped puzzle piece potentially fit into a larger, you know, a larger puzzle picture, right?

Yep.

And that's where we're gonna do a whole, we've, we've already done some, some of this, but we'll, we'll talk. in the next couple of weeks actually about integration specifically and about the challenges that exist with that. But in general, the idea here is that you still need to do the things, you still need to make your company the best. Again, you want to be attractive, right?

Yep.

And so, what you want to do at the beginning is to say, hey, look, maybe I'm going to attract a private equity firm or a financial buyer. Maybe I'm gonna buy, attract some single buyer guy that wants to have this, you know, maybe that's possible. Or maybe I'm gonna attract a strategic buyer. And again, you're gonna put a lot of time and energy behind the strategic buyer thing because the strategic buyer is going to be the most potentially the best outcome and the best fit. Okay? And what I mean by that is that again, from a strictly from an acquisition standpoint, When you are, again, a strategic buyer is probably a better buyer if you can find one.

Yeah. And one of the reasons why is, in my experience, is sometimes the financial buyers have sort of different, not different ideas, but a lot of their investment thesis is predicated on something that's going to change in the future. Right? Strategic buyer often is they have a product and they look at you as an— as Jo mentioned earlier, it's an adjacent product or geographic expansion. A lot of times with a financial buyer, they're looking at this from like, oh, I can take this and create a new industry from this company. And it can be really risky and it can be something that you may not want to do, right? Like in my experience, this happened with us. with a company that I worked with a long time ago as a partner back in 2000, 2006. Long story short, they had this idea that— did I think it could work? Yes, I did think it could work. Did I think it was likely to work? Well, I don't know about that. And it ended up not working. And the reason it didn't work, it was, it was a risky bet. They were, they were making a bet that they could create a new powerhouse to other existing companies like Bloomberg, and, and it just didn't work. And, um, And so they sometimes, they are along for a ride that you may not want to be along for if you're the entrepreneur of your sort of, of your mid to smaller size business. And hopefully that makes sense. But oftentimes your strategic buyer is sometimes a little bit more realistic and has a business plan that you can really understand because they're sort of in your market, if you will.

Yeah, exactly. And I think that's the— and I think a big part of that, and you're gonna figure this out as you talk with interested parties in the whole thing, and this is not— this is no small decision to make, right, is there may be particular— there might be a number of different strategic acquirers.

Yes.

And the reason that's obviously good for you, because potentially that, you know, potentially affects and drives the price up, obviously, if there's a bidding war and things like that. But the more important situation for you is to decide what's the best cultural fit. Because remember, even if you decide that you're going to be out in 2 years or 3 years or whatever, or even if right away, if you can manage that or whatever, the reality is that your entire organization, your staff, your, right, your everybody that you've been working with for years and years, right, is now going to be part of this other company. And so, you know, again, one of the big things from an integration standpoint that makes this stuff work after the fact, after the acquisition, is the ability to actually to have a cultural fit and for people to actually be able to actually integrate Yes. Understanding where the redundancies are going to be, making sure that you're taking care of those people that obviously that will be affected that way if you can, you know, things like that. And the reality is, is that the management of this very large, maybe public company, okay, very often, right, will be a public company. The rigmarole that you have to go through to be acquired by a public company, all the stuff that goes into it, it's even harder. Right? There's more scrutiny. That's— it's, it's looked at, you know, you personally could be investigated, like, for other things. It's a very big deal, okay? It's a very big deal. And so when we're talking with people who are potentially being acquired by, by people like this, one, one of the biggest pieces of advice that we can tell you is to sit there and go— is to say, make sure that you are thinking through what it is that you want and everything that you want out of this. Okay? And that includes what happens to your employees, what happens to your staff, what happens to your clients, right? Understand it all, right?

Yeah.

And the reason is, is because that's gonna make a big difference between— with, with who you go to. Your, your feeling of, is this the same company? Are these 2 things coming together? And again, I'll speak from my own experience and tell you that Very often, even when you think it might be a good fit, in practice it becomes a completely other thing. And that's something that in my story was, you know, the integration story was not great, right?

Yeah. And I have an integration story too. Like when we, when I was at another company I was at when I was not buying companies, but I was part of the integration team, it was one of those things where we went out to California after we bought a company. People were great, everyone's enthusiastic. And then we started to understand the technology, and it was kind of, it was kind of one of those one side of the table, two sides. There was two sides of the table, and we kind of looked at each other, and we both, when, when the technology and how it worked on the, on the technology side, because we bought this smaller technology company, we're kind of like, oh, we didn't know that. And it was one of those things that the deal had been consummated, we'd already paid for it, it was already part of our company. And I remember sitting there and saying, well, this isn't a deal breaker. This isn't like a catastrophic issue. But like, I know for a fact that my CEO, who was instrumental in putting the deal together, did not understand that their technology worked in this very specific sort of different way than we thought the technology worked. And if we had known that, would we have bought them? I actually don't know the answer to that question.

So, well, look, this is the thing, and this is again why you got to prepare yourself, right? And if you had— if you guys had prepared yourself the way that we teach people to prepare themselves, you know, whatever, right, then that— it probably wouldn't have been an issue.

Yes, right. Those questions are not good to have. And it's one of the things you go through— we teach in due diligence is you really need to understand not only the contracts, but if you're buying a technology company, you really know— have to have the understanding of how the whole tech stack works from consumer all the way down to the technology. And that's why you have to bring in experts, you have to bring in technology people. Buying a company is not just a financial exercise. It's financial, it's operational, it's technological, it's cultural, it's strategic, it's all those things. So if you look at it just from a financial standpoint, man, there can be a lot of challenges that you face down the road.

And you better believe that a big company, big public company in particular, is coming in. They're coming in with— and they got got their experts, okay? They know what they're doing, okay? They're not going to let something like that— like when John's case is not going to happen, all right? Very rarely do people miss things. Sure, absolutely. Are there, are there, are there political things that go on during an integration that things get skipped over and people just—

whatever? Sorry, this was a public company, just to be clear.

Oh, sorry.

Yes, but, but yes, it was, it was— there was political, there was things like we have to get the deal done. And that's how—

once again, we will go back to what we always say and what we're always, always bringing this back here on this podcast, which is that this comes down to human beings being human, okay? And the reality is, is that we can be— we can bring in all the experts and all the lawyers and all the stuff, and we can hope that every dot— I is dotted and every T is crossed and the whole thing. But like, once again, I will bring you simply back to Daimler-Chrysler and what happened with integration there.

Right.

And understand it doesn't matter how much money or how many lawyers or whatever, things get either sometimes missed sometimes ignored, sometimes outright, you know, uh, outrightly dismissed out of hand for, you know, even when they're essential things. And so you're not going to be able to control everything, but what you are— what you can control is what you can control, which is what your company is and what it does and what it looks like, right? And so the integration of that stuff, you can— all you can do is ask questions. All you can do is to say, is say, give me on paper how this happens. Who are the people who are going to be in charge? You got to know before the deal is consummated what, what are the people on my staff that are no longer going to be needed? What is their term for how long they're going to be around? You're going to need to know, you know, all that stuff. Are their entire— you know, are they going to strip off things and sell it for parts? I mean, that's a, that's a, you know, there's potential there. All we want is the sales organization, and the marketing people can go can go flip. Like, you know, that— you got to know that stuff before, right? Because why? Only because— and again, the deal's done, the deal's done, right? But after the fact, your life can be a nightmare, okay?

Of—

and we know people who are going through this— suing the companies that bought you. Oh, there's so many things that people do after the fact when they're unhappy, and they can look back at this thing and go, I made a huge mistake. And, and you only get— you don't get to undo this mistake, right?

Yeah, after you sign the deal and after, you know, you're— you've collected the money and you have that deal in place and they own the company, I mean, they can do whatever they want, really.

That's it. And look, they are— but, but, but make no mistake, they are coming with every resource they have to bear, and they've got a lot of them, and they're going to find every single thing Right? And they're going to uncover every rock, and they're going to look at, you know, every single document and everything else. Okay, so there's no hiding, there's no getting around any of this. It is going to be— but what we'd say is take— embrace it. Okay, take control of it yourself and to say, hey, look, I know that you're Google or whoever you are, and you don't scare me. Right? Because I know what I have, I know what I'm worth, I have the people on my side who are, who are helping me through this. And I understand that I'm not going to be taken advantage of, right? And, and I will say no to a deal with Google. Just, just say no. Sometimes that's what you have to do. Not, not recommending everybody say no to Google. I am saying, however, that it is worth the thought of saying that you don't have to do this, right?

Correct.

If it doesn't make sense for you in the, in, in, in every way it can. And again, that doesn't mean you get everything. Okay, it's a negotiation, but don't be afraid to sit there and ask for what it is that you want and ask the questions about what happens. How does this work? What will you do next? Who's the people that will be involved in that? Where do I sit? Whatever it is, right? Do I get a corner office? Do I get the thing? Do I get how many, right? What, what are we doing here? And so we've got friends, uh, and I'm thinking of like our, our friends at Strategix who have acquired, you know, smaller, you know, friends of ours and whatever and have integrated in. And then these smaller friends of ours just become are now, you know, vice presidents or whatever they are, senior vice presidents in this larger company, and they're gonna stay there and they're not ready to retire, and they're gonna stay there and work on this thing, and they're gonna get an equity piece and a seat at the table and nice little, you know, integration, right? That's gonna be— that helps their process and whatever. They brought their clients, they brought their way of doing a certain thing, and now they are part of a larger organization that is, you know, again, a billion-dollar company. And so they get to continue to be— to take— to get— to get advan— you know, uh, advantages from that, right? So you sold the company, they got a bunch of cash in the bank, and now they get to still go to work and still make $200,000 a year or whatever they're making, right? And they get to have this nice little life until they're done. And that's a beautiful— yeah, and they still get to do what they do.

Yeah.

And it's a wonderful thing.

All that— we see that all the time.

That is the— for my money, man, that is the way you want to go. You know what I mean? Because it is, it is, it just gives you, it gives you all the things line up. You can feel good about it. You know, you can walk away. You know, you can walk away. You cannot, you can say, hey, look, give me 3 years. There's, there's so much that you can do when it's a, when you, when you are, when it's a strategic buyer versus, versus any other kind of buyer. There's no question about it. And we see that these are the most, these are the transactions that happen most often. These are the transactions that are generally the most successful moving forward. And again, like I said, I think a lot of it is also about making sure that the rules for you as the owner, however, do not change, right? The things that you need to look at, the things you need to examine, the questions you're going to be asked, the due diligence process isn't any different. It might be more intense, but it's not going to be any different than a PE firm, that's for sure.

True.

So, the idea is that you're going to still need to do the things you need to do. You still need to worry about your salability. You still need to worry about your overall value. You still need to worry about, are you too close to the business? Again, even a strategic buyer wants an owner that is not junked up in the day-to-day operations of everything.

Yeah, it's so true. And we preach it, we say it all the time. I feel like I could preach about it, but it is so true because Again, if they're buying something, they don't want it dependent on someone who may no longer have ownership in the company. Maybe you have a little bit of ownership, but you don't have controlling ownership. And if you're doing everything and your management team underneath you is not doing enough and doesn't provide their value, you can rest assured that that acquiring company will get rid of those people. And you don't want that to happen, right? You don't, you don't want to sell your company and have that acquiring company get rid of everybody at your company at once. That's not good for them. That's not good for your employees. It's just not good. Over time, yes, there'll be attrition. There'll be people that leave. But, but most of the time that I've seen, we've seen it, is when, when a smaller company gets bought by a bigger company, that becomes a huge opportunity for all the employees at the, at the smaller company because it's a bigger company with greater resources, more, more chance to move up.

Growth potential.

Apartments. get into marketing if they've always wanted to get into marketing, get into product development. I can't tell you how many times I've seen it where the acquiring company buys a company and the project manager from one of the comp— the acquiree becomes a product manager or something like that at, um, at the new company. It happens all the time.

No question about it. And again, for our money, we as advisors, we are always looking for strategic buyers first. We always are, because the reality is that they make the best deals, they make the best things, they're mutually beneficial situations, right? They are things that both— we're both— and the best deals are the ones that where both parties are getting something out of it, right? And again, that's true of any deal, you could say, in general, obviously. But I think that the deals where there just is a more— there's more of a business fit.

Yeah. And I like to— I think of the word tangible. Right? There's, there's more of a tangible value in these strategic acquisitions, right? Because, you know, again, people are— people know their businesses, they know what they can do. Um, you know, venture capital has— and private equity has some crazy ideas sometimes, and there's a fit for companies. But I agree with you that strategic buyers and strategic acquisitions, a lot of— most of the time is obviously a meeting of the minds, but it's like, oh, I understand this person. I understand this business. They're not going into crazy new businesses. It's, I'm buying something that I understand.

And look, we're spending a lot of time on this podcast even today just talking about big companies buying smaller mid-sized companies, whatever. But the reality is that there might be a 400-pound gorilla just in your market that's not necessarily even a big, giant, huge public company or whatever. But is big enough in your market to be, from a competitive standpoint, that you would be interested in aligning with them. So, and that potentially would be, you know, again, merger and acquisition, whatever label you want to put on it, however the deal is arranged. There are most likely, you know, in your industry right now, 400-pound gorilla people who might be interested right now in actually what you have, and you probably know who they are. So the conversations could even start over drinks or whatever and say, hey, look, I've got this thing I want to get out. I have this thing that you would be interested in. Here are the 17 reasons why you should buy me, right? And again, you got to know what those reasons are, right? You got to go in, you got to do the work, you got to understand the market in terms of the business, not just the market, your market, in terms of what you're selling your product to and whatever, right? And so that's where the help, helping of advisors and things like that, like Us at Exio, or hundreds of other people like that, can actually help you be able to determine what is the value that you've got, what is the thing that people are going to want, and then they'll help you go out and find the people that might be interested in purchasing you. Those people aren't necessarily going to preclude private equity buyers as well, especially in an initial round of looking for people. You know, to buy. But the reality is, is that you are probably gonna have much more success in, you know, long-term, uh, by selling this to a competitor or to someone in your industry or into a 400-pound gorilla or to some larger, again, some larger public company that needs, needs what you have, right? And, and understanding that as you grow your business is also important. It's not just about the last day, right? You're— first of all, any kind of merger acquisition situation is going to take years. Okay? So to be clear, right, this is not something where you sell the company tomorrow, suddenly just sell it and they pay for it in cash and you walk out the door with the thing, right? You know this, right?

No.

The, the entire process of this thing could take years. And so being able to say ahead of time, hey, have thought it through, here's how I would like to do this. I would like to find a strategic buyer. Why do I think a strategic buyer? Would buy me. Here are seven reasons I think that a strategic buyer would find me attractive.

Blah blah blah.

Absolutely great financials. Get those things in line. Make the case for why that is, and then pick up the phone and start calling your competitors. I know it sounds like it's ridiculous. It's not. You know who your competitors are. You know them. You you probably you may even hate them. I mean, that's we come across that more than anything else.

Yeah, and I don't want to be bought by my competitor.

I hate that guy.

Yeah, and they're like, why do you hate him? And then you ask— we ask the question, why do you hate him? Be like, oh, he's my competitor. Like, yeah, right, exactly right.

But suddenly it's like, uh, you know, there are good— there, there are things that are good, potentially good fits and, and good opportunities that, that way when you start talking with people and are open, you know, to what the possibilities could be. But the process is going to be exactly the same as anything else, you know, and it's going to be— it's going to be getting— prepping yourself for that. So before you even get to worry, you know, You may come into a situation and say, look, I know a strategic buyer is going to be maybe the best fit for me, but that doesn't mean that these other things aren't viable strategies as well. And so the idea is that, again, the good news is prepping for any of this stuff. Don't even worry about what the actual thing is. Just get the company ready. Do the things you need to do as the owner. Back yourself off. Have a management team in place. Make sure that you have good customer concentration. Make sure that you're right. What are your financials like? Can you prove that over the last 3 years you've seen increasing revenue and increasing profitability, right? Can you demonstrate that on paper, right?

Clear up any lawsuits.

Lawsuits. Make sure you're compliant with everything. Do you have contracts that are right? Your supply— what's your supply chain like, right? What are you—

Risk, right? So anywhere you can remove risk from your business Be it lawsuit risk or compliance risk or anything like that, a buyer's gonna love that.

That's exactly right. So all those things are the same. And then, then what you'll have is a list of the, of 4 really good reasons why these 7 different, you know, uh, um, you know, larger companies would be interested in, in buying me. And it'd be a relatively easy case to make, right? Because if you're a healthy company and you're well put together and you've done the things that you know that you've learned on Exit Engine, what you should be doing, then you're going to be right in the catbird seat, right? You're going to be the person who's going to be the most identifiable, the company that's the most valuable, the most desirable of other people because you've gone through the work of getting the company right.

Yeah. And the other thing that we talk about sometimes, we don't talk about, I don't think we talk about this enough, is realize that when the strategic buyer is talking to you. They are talking to other companies like you, right? So yes, you may have some sort of unique niche and geographic, you know, uh, specialty or technology, but realize that from just a risk standpoint, they don't know you yet. They, they might be dealing with a crazy person. They don't know that you're not a crazy person and that you want a crazy multiple for their company. So just by definition, you have to realize that you are in competition with your competition and not selling your widget or selling your service. You're in competition with the other entrepreneurs who may be selling their business and whose businesses may be equally or more attractive than yours for whatever reason. So it's, it's further reasons why buttoning up all these things and making your company, um, be as attractive as possible Is critical, is a critical component of when, you know, when you wanna sell your company.

No question about it. And the reality is, before you're— before you decide to sell the company, do this work. Because you don't have to— you don't have to decide to sell it. What you have to decide is to make the healthiest, most attractive company that you can make.

Exactly.

Right. And that's a different mentality from what you've been doing for the last however many long years you've been doing this. You've been trying to grow a business, right, that, that makes money, that is profitable, that gives you a good living, that provides for your family, that does the all the things that you know that you do, right? And now you're in a situation where it's changing. The the changing the the nature of of get the of your of your company becoming the marketable asset, right? And and comparing that as a whole to other companies in the you know, in the universe that potentially could be good fits, right? That's what the other— that's what the buyers are doing, right?

Exactly.

They're looking at these individual things. And so what you want is you want the first step to be, wow, this company is a nice shiny apple, right? That's what I want. And, and, and then we'll get into the specifics and it still may not work out. Okay. But the reality is, is that, but it won't work out because you're not prepared. It won't work out because you're not a good company, you're not valuable, because it will work out with the next guy, right?

Yes.

If you're a good solid company, whatever, there are people— somebody will buy you. Somebody will buy you if it's that way. But if you think you're gonna put one over on Google, all right, or if you think that you can get away without doing some of this work and it's just gonna take care of itself or whatever, you're gonna end up screwed, man. You'll be on the losing end of that deal.

Very true.

Every single time. Um, this is the Exit Engine Podcast. I'm Joe, that's John. You have heard us, uh, every week now for I don't know how long, but we're going on.

This is—

I think this is like we're about to approach our 25th episode.

Yes, I, I did not know that.

Yeah, yeah. So, uh, it's been in, in, in 25 short weeks, um, since we started this. Uh, we're about to hit 25. I think it might be the— not this one, but maybe the next one. In any case, Very close to 25. That'll be a milestone for us to hit. You can find us at myexitengine.com. You can find us at, uh, at on LinkedIn at, uh, Exit Engine. Uh, you can find us where else? Uh, this podcast, obviously, wherever you get podcasts, right?

Yeah.

Um, we're out there all the time. Um, we're happy to answer any question you have about anything, just about always. Uh, info@myexitengine.com. Send us some questions. We are happy to answer them. But come check us out on LinkedIn, just follow our discussions. You'll find everything that we do here quite invigorating. And by the way, if you are a mid-market company and you feel as though you are ready to start contemplating an exit or need to understand that you need to get your business in order to start thinking about that, also reach out to us at info@myexitengine.com anytime.

Yeah, and the hardest step is that first step, is to start. Is to start to realize that while you know your business, you may be lacking in some of the things that you need to sell your business. That's— if you ever have that thought, info@myextension.com.

Drop us a line. Exactly right. We're gonna— and we, by the way, you know, one phone call, we're gonna teach you some stuff real quick that's gonna be— that's gonna get— that's gonna get your ship right, by the way, because just because we know there are things that almost every company has in common Okay? And some of the things that you're doing right now are things that, again, not your fault, but things that could immediately change your value right now. Okay? So, wherever you are, wherever you think you are right now, it doesn't mean where you're gonna necessarily gonna end up either. So, understand that part of selling a company is planning to sell the company. Right? And how you plan to do that, and that's what people like us at Exio and hundreds of other advisors out there can help you do. is to figure out how to go about this. What are the steps I need to take? What are the things I need to change? How do we get that stuff done? And then, I will be attractive to a strategic buyer or any other kind of buyer out there potentially if you have a solid asset that's ready to be sold.

Exactly correct.

Excellent. Thanks again for listening, everybody. I'm Joe. That's Jon. Have an awesome day, Jon. We will talk to you very soon.

Thanks, Joe.