Strategic Buyers Value What They Cannot Replace
Strategic acquirers—the buyers that usually pay the most—are looking for something they can’t easily do themselves. They covet that unique offering that would take too long—or cost too much—for them to duplicate. But the more extraneous offerings you add, the less valuable youbecome in their eyes.
Take Michael Lieberman, who co-founded a software company named Datastay. Itrevolutionized how brake manufacturers cataloged their design drawings through its productlifecycle management software. Datastay became synonymous with the brake manufacturingindustry. Lieberman was on a first-name basis with almost every brake manufacturing executivein the industry. He was the man to know, the one who hosted dinners at trade shows—he wasthe guy.
Then Autodesk entered the picture, seeing Datastay as their gateway to the product lifecyclemanagement software market. Autodesk, a billion dollar serial acquirer renowned for softwaretools indispensable to designers and builders across various sectors, acknowledged Datastay’sdominance in the brake industry and saw the potential to market Datastay’s product lifecyclemanagement software across the myriad industries Autodesk served.
Autodesk offered Lieberman an extraordinary ten times revenue for his nine-employeecompany.
Had Lieberman prioritized broad revenue growth, he might have diversified his offerings to thebrake manufacturers, diluting the core value that attracted Autodesk. Brake manufacturersneed all sorts of other software, but Lieberman remained disciplined and focused exclusively onproduct lifecycle management tools.
Lieberman could have branched out to other industries, but spreading his attention to otherindustries would have weakened his connection to the brake industry and invited competition.
Instead, he stuck to his knitting: Make the world’s best product lifecycle management software for the brake industry.
Private Equity and Strategic Acquirers See Things Differently
Unlike the private equity acquirer that usually bases their valuation on a multiple of yourEarnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA), the typical strategic acquirer is trying to calculate what your product or service offering is worth in their hands.
The typical strategic acquirer is much larger and better resourced than the companies theytarget. They don’t need you to diversify for them. Instead, they want the company that has theone puzzle piece they want, and the less diversified that offering is, the higher the premiumthey’re prepared to pay.