Partner Gerry O’Reilly continues his informative series of e-zines aimed at helping you increase the value of your business. These regular emails discuss a range of topics and learnings from business-owners who, through applying some simple principles, have achieved lasting value for themselves and their businesses.
In this update Gerry talks about the financial vs strategic reasons to buy a company and why Microsoft’s strategic acquisition of LinkedIn may not be as overpriced as it might seem. He also discusses the attractiveness of a recurring revenue model to the potential business buyer.
The financial vs. strategic buyer
A financial buyer is buying the future stream of profits coming from your business, whereas the strategic buyer is buying your business for what it is worth in their hands. To simplify, a financial acquirer buys your business because they think they can sell more of your goods or services, whereas a strategic buyer acquires your business because they think it will help them sell more of their goods or services.
Did Microsoft overpay for LinkedIn?
One might argue that at $26.2 billion Microsoft overpaid for LinkedIn, given that LinkedIn only generated a few hundred million dollars in EBITDA last year, but earnings are not the only thing strategic acquirers care about when they go to make an acquisition.
Microsoft‘s acquisition of LinkedIn is a classic example of a strategic acquisition. The US-based technology giant has been undergoing a major transformation from being a software company focused on operating systems to a business concentrating on cloud-based software applications. Microsoft may enjoy a dominant market share in the white-collar business sector, but many of these businesses have started to use competitive offerings from Google and Apple. Even more companies cling to older versions of Microsoft Office software, even though Microsoft is keen to move everyone over to the cloud-based Office 365.
In purchasing LinkedIn, Microsoft saw an opportunity to suck data from LinkedIn into Microsoft’s cloud-based software applications, making them irresistible. Now when you enter a business meeting into Microsoft Outlook suddenly the details of the event feature everything LinkedIn knows about your prospect – where they went to school, the previous jobs they have held and the scope of their current role – all without ever leaving Outlook. Microsoft is betting this kind of integration across its platforms will compel more people to upgrade to the latest software applications.
The lesson: You may be wondering what a billion-dollar acquisition has to do with your business, but the same thing that makes a giant buy another giant holds true for smaller businesses. To get the highest possible price for your business, remember that companies make strategic acquisitions as well as financial.
Have you discovered your recurring revenue model?
Recurring revenue is critical for the value of just about any small business, and it is equally import for the world’s largest businesses.
Consumer preferences have switched from purchasing products to subscribing to services. Good examples of recurring revenue models include ongoing service contracts, subscriptions, and memberships – basically any sale situation the customer has to proactively opt out of. The model has many benefits, including predictable and measurable revenue.
Why ICD bought Porto Montenegro
For a good example of the importance of a recurring revenue model, take a look at the Investment Corporation of Dubai (ICD) acquisition of Porto Montenegro Marina and Resort.
Porto Montenegro is the brainchild of Peter Munk, who is best known as the founder of Barrick Gold Corp. Munk fell in love with the natural beauty of the Adriatic coastline and saw an opportunity to buy an old naval ship yard and transform it into one of the world’s most exclusive travel destinations. The ultimate super yacht destination, it offers 450 berths, a 5-star hotel, ultra-exclusive residential properties and 250 high-end boutiques.
So why on earth would ICD, the principle investment arm of the Dubai government, be interested in buying a glorified parking lot in the middle of an old naval base?
Well, it turns out that super yachts need a lot of regular maintenance. In fact, the average super-yacht owner spends 10% of its value every year on repairs and maintenance. ICD wanted the steady flow of recurring revenue from maintenance contracts with the well-heeled owners who moored their yacht at Porto Montenegro.
The lesson: Porto Montenegro is a billion-euro reminder that recurring revenue is important for large companies, but creating an annuity stream can be even more important for smaller businesses. It can be tempting to celebrate the large project wins or a big sale to a one-off customer, but when it comes to valuing your business, acquirers may discount those as aberrations and focus on the steady flow of your recurring business.
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