The San Francisco 49ers were a great team this year, but they had a problem: Their offense was missing an elite running back needed for a championship. Not surprisingly, when superstar Christian McCaffrey became available at last month’s trade deadline, they paid a premium to get him.
It was a price other teams were unwilling to pay. The 49ers were willing to pay the most because McCaffrey was a solution to an acute problem unique to the 49ers.
Acquirers operate similarly when looking to buy a business. Investors will pay a premium for your company if it helps them fill a specific need.
For example, in 2015 Nick Santora founded Curricula, a cyber security awareness training program that helps companies defend themselves against hackers.
By 2019 Santora had arrived at a crossroads. To continue to grow his business, Santora needed to raise money. For six months, Santora pitched anyone who would take a meeting. Santora estimated he met with over 60 investors but was unable to raise a dime.
That’s when he had an idea.
Instead of approaching random investors, Santora decided to target acquirers and investors that specialized in cyber security. As he described in a recent Built to Sell Radio episode, Santora attended a cyber security trade show and walked away from the weekend with a $3 million check.
Like Santora, Dr. Joseph Marchell found a group of buyers willing to pay a premium for his company when he moved from targeting generic investors to acquirers that were focused on his industry. Marchell started Old Brown Dog Veterinary Partners after identifying a unique opportunity to roll up a handful of family-owned animal hospitals.
He bought three veterinary practices based on a mainstream valuation of ten times EBITDA. Marchell then rolled them into one group, implemented some operational efficiencies, and began searching for private equity groups actively rolling up vets.
Marchell flipped the business less than two years after he bought it for a whopping 28 times EBITDA.
The Importance of Pitching to the Right Group of Investors
Before putting your company on the market, creating a list of potential buyers for your company is paramount. Rather than courting generic investors, I’ve learned that founders that sell for the highest multiples understand the key players in their industry that are paying a premium for businesses like theirs.