If your eventual exit plan involves getting acquired or merging with a larger company, what steps should you take now? As a follow-up, what questions should you ask potential acquirers or purchasers? We've never needed to take on debt, but should we obtain business credit simply to have a good credit record?
My personal belief is you define success for your company and you work to build a great company that is successful on all fronts, and opportunities will present themselves. So the steps you take now are build a profitable business of value.
As for taking on debt for a good credit record...I think the more important question is are you utilizing your capital structure in the most beneficial manner? So for example, if you are using only cash for all operations...someone might come in and say "Yes debt comes with interest and a cost, but by taking on debt you could expand at a justifiable rate that would lead to greater revenue that could allow you to pay off the debt and also be making more money." Taking on debt is not necessarily a question of "need." But If your demand is exceeding your current ability to supply, it would likely make sense to take on debt to expand in a way to be able to meet that demand. If you don't and continue to grow organically, you could lose some of the demand to competition that can supply it.
Really not enough information. A lot will depend on the acquiring company as well. For the focus of your business, a good credit rating will certainly help and provide safety should you ever need to borrow...in stressed times or times of expansion.
I second David's answer. Succinctly put: don't build a business with the intention to sell it, build a good business and worry about selling when you have people showing interest in buying. Simple rationale really: companies get bought because they're generally good businesses that somebody else wants to benefit from, and the stronger your business is the better negotiation position you'll be in if/when the time comes to deal with a potential buyer. You might not even want to sell at that point!
I appreciate everyone weighing in and sharing your advice! To answer the question raised a couple of times, we have been actively solicited by interested parties, which is what prompted my original question.
There are a couple views that could be taken depending on the circumstances:
• Value: I agree with David M that it is important to build value. Ensure you have a solid, repeatable business model that brings in revenue. Ensure a strong team and company.
• Just in time: Startups tend to have sparse resources and still need to move fast. This means that there needs to be a core plan, and that how much time you put into each bucket depends on what is the most urgent thing. So, evaluate if you are getting into that timeframe to start to work on that topic (vs other things).
• Clear plan: Investors can appreciate if you have an idea of how you are going to exit and the general plan on how to get there.
• Lead Time: Just as you need to figure out the customer of your product, you also need to figure out the “customer” (the larger company) and know how to sell to them. This may take time: research, follow and interact with them on social media, get introductions, work with advisors knowledgeable about that company, determine their M&A habits, etc.
In general, don’t do the work until you need to.