How Founders Can Generate A Higher Sale Price from Their IP
Daniel J. O'Connor
I work with Inventors and R&D teams to secure their first or next significant cash-generating transaction, such as capital, licensing, distribution, or a trade sale.
When engineering a trade sale of intellectual property, one frequently observed phenomenon is the substantial increase in the financial gains that founders experience from selling their subsequent businesses compared to their first ventures. This marked difference can often be attributed to a crucial factor: the strategic consideration of the end buyer profile. Founders who have navigated the complex journey of building, scaling, and selling a business once are better equipped to tailor their ventures to meet the specific needs and desires of potential acquirers, thereby maximizing their return on investment.
Learning from Experience
The sale of a first business is often a learning experience for many entrepreneurs. While initial ventures are typically driven by passion, innovation, and the desire to solve a problem, the exit strategy might not be as well-defined. Founders may not have a clear understanding of the acquisition landscape or the attributes that make a business attractive to buyers. As a result, the sale process can be lengthy, complicated, and sometimes less profitable than anticipated.
However, once founders go through this process, they gain invaluable insights into the criteria that buyers prioritize. They learn the importance of demonstrating stable revenue streams, scalable operations, and strong market positions. This experience allows them to build their subsequent businesses with these factors in mind, making them more appealing to potential acquirers.
Strategic Business Design
When founders set out to build their next business, they do so with a refined vision that includes a strategic endgame. This vision encompasses not just the product or service offering but also the overall business model, operational structure, and market positioning. Founders consciously design their businesses to align with the profiles of likely buyers, whether they be private equity firms, large corporations, or publicly listed companies within the industry or the market.
By understanding who the end buyer will likely be, founders can tailor their businesses to meet these specific acquisition criteria.
Identifying Suitable Entities Within the Industry
One of the key advantages that experienced founders leverage is the ability to identify suitable entities within their industry or market that can benefit significantly from acquiring their business. These entities are often well-positioned to extract synergies, such as expanding market reach, enhancing product offerings, or achieving economies of scale. Importantly, these advantages come at no additional cost to the founder but can significantly enhance the business's appeal and valuation.
A strategic buyer within the industry will typically see more value in the acquisition than an outsider. For example, a larger company may look to integrate the acquired business’s technology to bolster its product portfolio or use the new business’s customer base to cross-sell its existing services. This inherent value makes industry-specific buyers more inclined to pay a premium for the business, benefiting the founder significantly.
Leveraging Initial Investors as Potential Buyers
Founders who carefully screen their initial investors can also find the investors who can become ideal end-buyers. These investors are already familiar with the business, its potential, and its operations. They have a vested interest in the company's success and are often willing to pay a premium to gain full control. Properly screened initial investors can streamline the sale process, reducing due diligence complexities and negotiations, thus making the transition smoother and potentially more lucrative for the founder.
The alignment of interests between the founder and the initial investor can facilitate a seamless transaction. The investor, understanding the business intricately, is more likely to value the business appropriately and is positioned to leverage its full potential. This makes the initial investor a highly attractive buyer, often leading to a more favorable sale price.
Executing Cashless Transactions with Public Listed Companies
Another sophisticated strategy that seasoned founders employ is targeting public listed companies for acquisition. This approach can offer a highly advantageous cashless transaction through a scrip-for-scrip rollover. In a scrip-for-scrip transaction, the founder exchanges their shares in the private company for shares in the acquiring public company. This type of transaction can be particularly beneficial for several reasons:
1.???? Tax Efficiency: Scrip-for-scrip rollovers can defer capital gains tax, allowing the founder to maximize the immediate value from the sale without incurring substantial tax liabilities.
领英推荐
2.???? Liquidity: Shares in a public company are more liquid than shares in a private company. The founder can sell these shares on the open market at their discretion, providing flexibility in managing their wealth.
3.???? Continued Upside: By holding shares in the acquiring public company, the founder can continue to benefit from the future growth and success of the combined entity. This ongoing participation can be highly lucrative if the acquisition results in significant synergies and value creation.
4.???? Pegging a Higher Price to KPIs: If the agreed price is lower than you would have liked, the Founder can negotiate a further issue of shares or options, subject to the project performing as expected. This helps mitigate the risk of the buyer but rewards the vendor for helping the project meet its highest potential, of the next months or years.?
Enhanced Negotiation Leverage
Another significant advantage for seasoned founders is their improved negotiation skills. Having experienced the sale process before, they are better prepared to navigate the complexities of deal-making. They understand the importance of timing, how to position their business in the best light, and how to leverage competition among potential buyers to drive up the sale price.
Additionally, founders who have previously exited a business often have a network of industry contacts, including potential buyers, advisors, and investors. This network can be instrumental in facilitating introductions, providing market intelligence, and offering strategic advice during the sale process. Such connections are a valuable asset that can significantly enhance the terms and outcomes of the transaction.
Increased Market Credibility
A successful exit establishes a founder's credibility and reputation in the market. Subsequent ventures benefit from this enhanced standing, attracting higher levels of interest from investors and buyers alike. Buyers are more inclined to trust and invest in businesses led by founders with a proven track record of success. This credibility can lead to higher valuations and more favorable terms during the sale process.
This shows the lessons learned from previous ventures enable founders to build businesses that are more resilient, scalable, and attractive to buyers. They are adept at avoiding common pitfalls, managing risks, and implementing best practices that enhance the overall value of their companies.
The reason why founders often make significantly more from the sale of their subsequent businesses is that they have given considerable thought to the end buyer. The experience gained from their first sale equips them with the knowledge and skills to strategically design, build, and position their ventures to meet the specific needs of potential acquirers. This strategic foresight, combined with enhanced negotiation leverage, market credibility, and a robust network, enables founders to achieve greater financial rewards from their subsequent business sales. As such, the entrepreneurial journey is not just about innovation and passion but also about learning, adapting, and strategically planning for future success.
By focusing on suitable entities within the industry, leveraging initial investors, and considering cashless transactions with public companies, founders can significantly enhance the appeal and value of their businesses, ensuring more lucrative exits. The entrepreneurial journey, therefore, evolves from mere business creation to mastering the art of strategic exits, culminating in substantial financial gains and lasting success.
Would you like to set your new innovation or startup project to ensure you will get the highest price when you decide to trade-sale it? Book a 30-minute discussion with us and we can assess your potential and show you what steps to take early. www.academy30mins.com
P.S. If you can see how this information can help you get better traction in your current project, here are four ways we can help you get your plan finalized, have your project adequately funded, and plan your first/next cash-generating transaction:
The energy production and storage technologies used in the world now are turbine engines. These are inefficient technologies, so they cannot be used to produce energy from the sun’s heat. I have patents that feature highly efficient technologies that are easy to manufacture and assemble and will convert the sun’s heat into economically viable energy.
Making the intangible tangible! - IPM Consultant and Patent Attorney -Tangible IP
3 个月All good points Daniel. Usually of course the trade buyer is buying much more than just the formal IP. It's vital to recognise that there is a holistic value from the whole. If the business strategy is a trade sale then there is much that can be done with the IP aspects of the business to enhance the ultimate sale value for the business as a whole. One is to ensure where possible that any patents read onto improvements in the technology of the target AND their competitors. In essence if you are starting a company for a grade sake you are developing the IP for that buyer and not your own company.