Strategic Fit vs Strategic Readiness
A few weeks ago, I had a call with Chris Schulitz, who leads transaction execution at Paychex. We were talking about one of our new clients at SurePath and how they could be interesting to Paychex at some point, making it clear that we were not actively marketing them at the moment and instead just offering to make an introduction to the CEO if he was interested in learning more about the business and space.
"You know, I really appreciate this kind of early heads up on an engagement," Chris responded. "This is an area we have talked about internally, but don’t yet have a clear view on how we may want to offer something like this. There's a real difference between strategic fit and strategic readiness."
That comment instantly resonated with me, because it perfectly encapsulated our approach here at SurePath and what we often have to explain to our clients when a buyer passes due to “timing”. Strategic fit and strategic readiness are not the same thing, and just because your company is a good strategic fit for a buyer doesn't mean that they are going to be ready to acquire you when you're ready to exit. We try to drill this idea into the heads of our clients and potential clients at every opportunity.
Strategic fit is an easy thing to demonstrate. If a small company provides a needed solution for a problem a big company has, there's a strategic fit. Our clients often create products that would be an easy add-on to the existing product suite of a larger company. All it would take to make everyone happy is for the big company to buy the small one, right? Seems like an obvious win/win situation, doesn't it?
In reality, things are a bit more complicated. At most (if not all) companies, it still takes a lot of resources, time, and buy-in across the business and product teams to move forward with an M&A opportunity. There are millions of dollars at stake — maybe hundreds of millions — and considerable logistical, technological, and organizational issues to consider. It's a complex process with a lot of moving parts, and it can take years before a company is strategically ready to make a purchase.
If you want to be acquired by a bigger company, you can't just rely on the fact that your product is a good strategic fit for them. You have competitors, after all. Instead, you want to build strong relationships and deep partnerships with your potential buyers. This allows you to be at the top of their list when they're strategically ready to make a move in your particular category.
To understand why this matters, consider the typical reactions we get when we approach potential buyers cold on behalf of our clients. This often happens in an auction situation, or when one of our clients has urgent inbound interest and they’ve asked us to “shop” it to other potential buyers. We usually get one of three responses:
- "Yes, this company does sound like a good fit for us. We’d love to learn more. Let's set up a meeting.” Unfortunately this doesn’t happen as often as I’d like.
- "We're interested, but the timing isn’t great. What your client has to offer is just not a big priority for us at the moment, but would be happy to learn more about them if the timeline isn’t rushed.. If they decide not to sell now, we could explore how we might eventually work together."
- "We're not interested. This is not currently a product or strategic priority for us."
Unless a likely buyer already knows your company, even the best response tends to be lukewarm. That's why we encourage our clients to engage with potential acquirers long before they even consider an exit. It's easy to set up meetings to talk about potential partnerships with the corporate and business development teams at most companies. That’s their job. If you have a product they really need, it's often possible to meet with the GM or Product Owner, which can be very helpful down the road.
At SurePath, we work hard to know every major buyer and product owner in the SMB software and commerce space. As we evaluate new clients, one of the first things we do is create a list of companies who might be a great fit for an eventual sale - sometimes even calling buyers to gauge interest on a no-names basis. If it appears to be relevant, we’ll often facilitate an introduction early in our engagement. This allows our clients to understand the priorities of their potential buyers, and for those buyers to keep tabs on the company's situation, product development, and leadership. This not only helps to establish a strategic fit early in the process, but it also raises our client's profile when the larger company is strategically ready to make an acquisition.
Building and investing in relationships with your natural acquirers as early as possible is one of the best things you can do for your eventual exit. This is particularly true when your business is still relatively small as your acquisition isn't likely to move the needle for a large buyer. If they are going to buy you, it’s because the product you’ve built is already on their roadmap and superior to anything they have seen or feel they can build. They've already decided that they are going to buy the solution they need, rather than built it themselves, and they're willing to pay a premium to accelerate their plans.
Your goal is to already be on their radar when they decide that it's time to make a purchase.
About SurePath Capital
Based in Toronto and San Francisco, SurePath Capital Partners is the only investment bank focused exclusively on the global SMB software market. We work with sellers in this market to ensure they are funded for growth and positioned for meaningful exits. In addition, we work with buyers in this market to help shape their strategy and execute acquisitions.