In this week’s edition of Built to Sell News, we use Capital One’s reported $297 million acquisition of Velocity Black (listen now) as a case study on how to turn your largest customer into an acquirer:
- Approach them about being a customer
- Say no to exclusivity
- Rebuff offers to invest
- Agree to be acquired
It’s tempting to think that selling a business is a dramatic boardroom struggle with dozens of anonymous companies trying to outbid each other for access to your business.
In reality, most acquisitions are friendly affairs where two companies that have known each other for some time decide to tie the knot. That’s why seeking out partnerships with larger companies now can have a hidden benefit down the road. On the surface, big customers and partners are obvious sources of new revenue, but look behind the numbers, and you’ll find many of your largest clients and partners are your most natural strategic acquirers.
Take a look at the story (listen now) of Alex Macdonald, who co-founded Velocity Black, a digital concierge service for affluent clients in 2014. Unlike the basic concierge services of some credit cards, Velocity Black leverages technology and expert knowledge to curate personalized services such as private air travel, entertainment, shopping, and dining, accessible directly from your phone.
Macdonald started out by selling access to Velocity Black to high-net-worth individuals but quickly realized the opportunity in offering large organizations the ability to outsource their concierge program to Velocity Black. Many of the largest credit card companies in the world, along with premium brands like Rolls Royce, used Velocity Black’s program to offer a concierge service to their most affluent customers.
Therefore, it wasn’t a surprise when Capital One, the $44 billion Richmond-based bank, came knocking. Capital One’s original approach followed the contours of the typical enterprise deal but quickly morphed into a nine-figure acquisition offer for Velocity Black.
Capital One’s reported $297 million acquisition of Velocity Black provides a great example of how to turn your biggest customer into your acquirer.
Step 1: Approach Them About Being a Customer
The first step in turning a large enterprise organization into your acquirer is to approach a giant about buying your product or service.
In Macdonald’s case, this came easily as they had already licensed their platform to a variety of financial institutions, so it was natural for them to approach Capital One, one of the largest financial services organizations in the United States.
If you are aiming to be acquired by a strategic such as Capital One, Touraj Parang’s episode provides a blueprint for establishing a strong relationship with a potential strategic acquirer. Parang was at the helm of the acquisition group for GoDaddy.
Step 2: Say No To Exclusivity
If a large customer gets excited about your product or services, they are not going to want their competitors to have it. As a large business, they are used to throwing their weight around in a negotiation, so they often ask for exclusivity in their category. They can, and often do, threaten to develop a competing product if you won’t grant them exclusivity, but it’s almost always a mistake to offer it because granting exclusivity will make you overly reliant on one customer, a massive problem for most acquirers.
During the interview, Macdonald said, “Just about every large enterprise organization we sold to asked for exclusivity,” but with the exception of offering some very limited exclusivity for a few months in a single market, Velocity Black never granted it.
Step 3: Rebuff Offers to Invest
If you say no to exclusivity, the next logical way for a large enterprise organization to get some sort of proprietary access to your innovation is to become an investor. Many large organizations have investment arms (e.g., Google Ventures, Salesforce Ventures, Walmart Ventures, etc.) to invest in promising start-ups. Having a big company as an investor has lots of advantages. You can often lock them in as customers for life, plus you get access to industry information and wisdom you couldn’t get on your own.
However, large enterprise investors typically demand some right of first refusal on buying your business outright. It can be good to have a built-in acquirer on your cap table, but it can also weaken your negotiating leverage with other potential acquirers who compete with your investor.
Listen to how an investment from Salesforce Ventures almost derailed a 9-figure exit for Matt Schmeltz.
In Velocity Black’s case, once Macdonald said no to Capital One’s request for exclusivity, Capital One Ventures asked to invest, but again, Macdonald turned them down. The business was cash flow positive, he didn’t need the money, and there was a cost to bringing the fox into the henhouse.
Step 4: Agree to be Acquired
After firmly declining both exclusivity and an equity stake, the eventual and sometimes logical progression of an enterprise partnership may culminate in an outright acquisition proposal.
This was the situation with Velocity Black. When the company achieved annual revenue of $30 million, Capital One, having been previously rebuffed in their attempts for exclusivity and an equity stake, finally extended a decisive offer. They proposed to purchase Velocity Black for a reported $297 million, amounting to roughly ten times the Annual Recurring Revenue.
📽️ Clip of the Week
In this clip, Macdonald candidly discusses how he tactfully handled the requests for exclusivity from his enterprise clients.
📣 Quote of the Week
“Pretty much every enterprise client we had asked for exclusivity”
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– Macdonald sharing the challenge of working with enterprise clients.
🛠️A Tool to Help You Sell For a BIg Multiple
If you want to sell for a big multiple like Macdonald, you’ll need to prove to an acquirer that your business can run without you. The easiest way to prove this to an acquirer is using VidGuide™. VidGuide enables you to create a comprehensive video playbook for your business, which can be presented to potential acquirers as concrete evidence of their ability to run the business without your direct involvement. Set up a free 30-Day VidGuide trial.
🏆 A Luxurious Trophy
To celebrate his accomplishment, Macdonald took some friends away for a weekend trip to Cowarth Park, a luxury country house hotel located in Ascot, Berkshire, United Kingdom. It is set amidst a picturesque 240-acre estate and offers a tranquil and elegant retreat for guests. A stay at the Gardner West Cottage Suite will run you a cool £3,185 a night. He shares the moment at the 1:00:10 mark of the episode.
📈 Recent Deals
- Minntronix has been acquired by Standex International Corporation (NYSE:SXI) for approximately $30 million in cash. Standex used its existing cash balance to finance the transaction. In its first year of ownership, the company expects the acquisition to be accretive to its earnings and to achieve a double-digit return on invested capital.
- Precision Metal Works, Inc. (“PMW”), a Kentucky-based Metal Stamping and Value-Added Manufacturing Company, has been acquired by Live Ventures Incorporated (Nasdaq: LIVE), a diversified holding company. The acquisition involved a total consideration of approximately $28 million, with $25 million paid in cash and up to $3 million in additional consideration through an earn-out.
This Week’s Contributors
Colin Morgan, Executive Producer of Built to Sell Radio, John Warrillow, Host of Built to Sell Radio, Daphne Parsekian, Copy Editor, and Denis Labataglia, Audio Engineer.
