Innovation vs. Maturity: The Choice is Yours

Acquisitions of innovative start-ups tend to grab the headlines, but many business buyers prefer to target mature companies that promise dependable revenues. Each choice offers advantages and potential pitfalls, and buyers need to carefully consider their objectives before starting their search.

Sellers also must ask the innovation vs. maturity question. Specifically, they need to identify their position on the spectrum so that they can successfully market their company and find the right buyer.

Why Buyers Want New Ideas

Buyers typically seek young companies for one or more reasons, including:

Lower purchase price – A start-up with a low market valuation or minimal expenses can be relatively cheap to acquire. Buyers often pay for such deals in cash to avoid the hassle and cost of bank financing or because the young company may not yet be eligible for traditional debt.
R&D alternative – Rather than devote capital to expanding its own research and development efforts, a buyer can externalize early development costs and risks with a start-up that has the necessary products and talent.
Shot in the arm – Start-ups also may appeal to buyers that want to rejuvenate their own mature operations. Sellers with a toehold in newer sectors or even foreign markets can be particularly appealing.

Why Buyers Want Experience

Mature companies, on the other hand, tend to attract buyers that want a steady revenue stream to bolster their bottom line. They value such features as established product lines with dominant market share and longtime customer bases. Such buyers are more focused on immediate benefits — as opposed to growth potential — and are likely to appreciate turnkey opportunities. Because easy integration is important, they typically try to acquire a culturally compatible company. 

But buyers also need to watch out for common mature-company pitfalls, such as a declining business model or lack of new products in the development pipeline. Mature companies are also more likely than start-ups to have obligations such as bank debt or ongoing employee benefit costs.

How to Sell Ambition

When it comes to selling on the M&A market, start-up businesses need to position themselves differently from mature companies. For example, when making initial contact with a potential buyer, a young company should emphasize such qualities as its: 

• Pipeline of new products, 
• Intellectual property and goodwill,
• Promising R&D operations, 
• Cutting-edge technologies, and 
• Marketing advantages over mature companies, such as a large social media presence or a reputation as being the “next big thing.”

However, even young companies should be prepared to make a case for their business savvy and ability to go the distance. Buyers are increasingly attuned to the risk of acquiring a business with lots of ideas and little to show for them. A solid business plan and financial projections can help a seller show that its model is sustainable over the long term. M&A advisors, who understand what buyers look for, are critical at this juncture. 

One other issue: Most start-ups are staffed by people whose ambitions probably outweigh their experience and most established companies are run by experienced people who may be less receptive to new ideas. Sellers should indicate their willingness to adapt to new expectations and a more structured environment.

How to Market Longevity

Companies that land on the mature end of the innovation vs. maturity spectrum have several marketing advantages — even in an M&A environment that celebrates start-ups. These types of sellers can emphasize their experience and longevity, including the ability to survive and thrive in difficult economic conditions. A company history not only demonstrates how a mature business has handled market contractions, but also its resilience when confronted with challenges such as a new sector rival or the loss of a major customer or key supplier.

Even though experience is a mature company’s main selling point, these sellers can’t afford to ignore innovation. They should also highlight prospective products or market opportunities that a buyer with capital and other resources could bring to fruition.

Good Match

For buyers, the choice between innovation and experience is often clear. Companies in a strong competitive space may be able to take a chance on a start-up. Those that need a reliable source of revenue should probably look for an established business. As for sellers, they should learn as much as possible about potential buyers’ objectives to help ensure a good match.