Planning for an Acquisition Strategy

I am a software developer half-way through the design and prototyping of what I believe will be a very successful new software product.

Soon I will begin development, and am currently planning on being launch-ready by early 2014. My game plan is to deploy to a Platform-as-a-Service (PaaS) provider using a free tier of service, so that the product can sink or swim without costing me a dime in hosting costs. Other than the formation of my 1-man LLC (less than $1,000 USD), and a few other petty expenses, the startup will be very cheap.

My "end game" strategy with this product would be to gain quick success right out of the starting gate, have strong, demonstrable growth, and be acquired early on, hopefully only after a few years.

Not being a "business guy", and not knowing what the right etiquette is here, I need to start planning for the contingency that everything goes according to plan (!), and that several years from now I have a solid product that could be easily acquired for a healthy profit.

How does one kickstart this process? I've heard the term Letter of Interest before, but usually only with regards to when Company ABC wants to buy Company DEF; they send a "Letter of Interest" expressing interest in acquiring DEF for $X amount of money, and under Y terms.

But here, I want to be in a position to reach out to prospective acquisitioners and say "Hi, we are Company DEF, we are worth $X and have Y finances, would you like to buy us? "

How does this scenario usually unfold in the real world? Thanks in advance!

In terms of your planning for getting purchased, my personal opinion is this is absolutely bottom of your list of things to worry about. You haven't started yet, you're getting ahead of yourself.

Just make sure your company is formed correctly, everything you do is legal and that the company clearly owns whatever is created.

My advice would be forget chasing that buyout and concentrate on product, product, product. I understand coding takes time, but I'd suggest taking a knife to non-critical features. Don't assume what you're building is the right thing. Get it out to as many people as possible as early as possible and listen (really listen) to what they say about it.

Don't offer them it for free, tell them "this is the full price, would you buy it? No? Why not?".

When building a company you need a vision of what you want to achieve and a strategy of how you want to get there (and getting purchased isn't a vision).

Your financial plan is completely unrealistic:

1. Where's your marketing budget? Do you expect users to find you just because you have a great product? sorry real life doesn't work this way.
2. Using PaaS free tier: Successful (as in acquire-worthy successful) companies have lots of users -> Lots of users use lots of bandwidth and processing power -> bandwidth and processing power costs money. The free tier of PaaS providers is designed to not be able to support successful companies with lots of users (because PaaS providers aren't idiots, they aren't in the businesses of paying your hosting bills for you). PaaS let you start and stop services whenever you want and let you pay only for the time the service actually runs - but for services running 24/7 (like your first server) PaaS is more expensive than traditional hosting. You can start with PaaS free tier (or you can start with shared hosting that isn't free but is dirt cheap) but you better have a plan to start getting people to pay you before you reach the limits of your cheap hosting.
3. Being a one man company until you get acquired If you have so many users you are worth acquiring you have too many users to support yourself.
4. Forming a one man LLC for cheap This is ok if you just want to open a business - but to get acquired or to get funding you need all your legal and financial in perfect order - that means you need a lawyer and an accountant - and not just any lawyer and accountant but people who have experience with preparing companies for being acquired - and this costs money, lots of money.
5. Offering you company for sale Contacting other companies and offering to sell is how one small company is sold to another small company for approx 12 month of profit, if you want Google to buy you for a billion dollars you have to get them to contact you (and continue to be in business until they do).

Do you see what's common to everything I wrote above? you have to spend money, lots of money, you have to pay lawyer and accountants, you have to spend money getting users, you then have to pay even more money servicing those users and you have to keep spending money until some large company notices you and decide it might be nice to acquire you.

That is why most large acquisitions are of VC-funded companies - to get big enough to be worth acquiring by the Googles of the world you need to spend tons of money.

On the other hand, the "bootstrapped" model is to start small, charge customers early and grow slowly using money from earlier customers, this let you start a business with no (or very little) external funding and get to the point your business can support you and your family relatively quickly - but it will take you a loooooong time to get big enough to be acquire-worthy.

If you try to start a bootstrapped business but try to act like a funded business (that is, get big fast) you will just run out of money and go out of business.

I agree with David, the buyout is a while away yet and you need to prove yourself first.

But to answer your question, IT DEPENDS on a lot of factors like

• on what sort of business your in
• how big and visible you are and how your competition / prospective buyers view you (competition, additive to their offering, opening new vertical market, entry into a new country / region).
• What do you own they want? (Customers, data, market share)

Which leads them to ask

• Does buying you let them compete head on with a larger player?
• Does it get them new technology they couldn't build themselves (this one usually isn't a big issue)?
• Does it get them a loyal following they haven't managed to build themselves? If it does, can they exploit that to sell other things to that loyal market.
• Or something specific to them ...

Generally If you start growing fast and "fit" with a larger players business model and objectives (this isn't so much the product but how you find your clients, how you price your product, segment of the market you do well in etc) then they may say "buying this will put us 2 years ahead in this market ... ", so your price is "what is it worth to them to get 2 years ahead with a single purchase".

There are agents that you can hire to discretely investigate and get the attention of your target buyers.

So when your thinking about a buyout the key questions are,

• Who are the most likely 3 to buy me?
• Why would they want to buy me rather than crush me or buy someone else?

Which you come to by breaking it down into

• Who are the biggest players in the market?
• Who are big players wanting to get into the market (eg. News Ltd into blogging/tech sites)
• Who are the second tier players or players in another country that might want to join forces?
• Where else might they be hiding?
• And lots more along these lines

What matters to the buyer? Not the technology!

The hardest bit for a techie like me to understand is that more than 95% of the time the technology really DOES NOT matter.

Unless you have an algorithm for predicting tomorrows stock market trends or finding oil from map data ... anything else a team of dedicated techies can rip off and improve on your idea in the same or less money than it takes to buy you out.
So that is NOT what your selling.

Generally a "technology driven" buyout is because they couldn't be bothered and they want to expand their product offering without the hassle. This is often sales driven companies who have "forgotten" to invest in further R&D and now need something new to sell.

But more likely a buyout is because you have specific profile of customer (age, interest, geoloction) who pay money, swell the ranks, provide data or look at advertising.

Summary Its the profile of customer (existing and potential) that has value ... so now when you build your cool idea, what are you going to build (and charge) in order to get the right profile of customer that makes your idea worth buying?

Now your in a position to be able to work out how you, an agent or other party (like a VC) may kick off the process.