MusicMetric, a platform for measuring music and singer data from several different services, was recently acquired by Apple for around (unofficially) $50 million. The parent company, SeMetric, wasn’t necessarily making a profit from MusicMetric, but Apple obviously gave them an offer that made the owners and investors happy.
The purchase of SeMetric looks like a strategic acquisition, assuming there is not much profit being generated. It’s a powerful analytics company that can help Apple gather and distribute music data in a way that has not been seen before. This is a perfect example of a larger company buying a much smaller one to help the larger one expand, and is one of the four main reasons acquisitions take place. These four reasons are:
- Potential for growth;
- Fulfilling a need;
- Current market conditions.
How Profitable is your Business?
Generally, an acquirer is more inclined to buy your business if they expect an immediate return on their investment with current profit. In some sectors, profitability is not an issue due to other factors. Google bought YouTube for $1 billion before it turned a penny in profit. Still, profitability helps you, as the seller, command the highest purchase price.
A profitable business is attractive to a larger number of buyers than an unprofitable business, with more interest generated as your profitability increases. Your profit margin also plays into whether an acquirer is interested in your business, with a higher margin presenting less of a risk to a buyer.
What Kind of Growth Potential can a Buyer Achieve?
Businesses in high-growth industries, or those located in markets primed for expansion, attract acquirers and draw robust bids. If you know that your business is perfectly suited to expand in the near future, decide if you want to deal with that expansion yourself, or if you want to put your exit strategy into practice.
Even a business that does not have explosive short-term prospects, but is expected to perform well in the long-term, is desirable to other companies in the same industry. Any type of growth potential is good and is of interest to a buyer. Buyers are negatively affected by no growth prospects, or even retraction of the business.
Can your Business Help a Larger Company Expand?
Your business may be the perfect strategic acquisition for a larger business intent on growing their presence in your industry or breaking into the industry. An acquirer looks at what your business offers them. Perhaps you are a competitor of theirs in certain markets, or within a certain sub-section of the population. If a business believes they would become more profitable with your company under their ownership, you may find that are open to acquiring your business.
In some cases, the company interested in yours is not a player in your industry at all, but rather looking to get their foot in the door. To them, you may be one of a few different targets. Since they are new to your industry, they may ask you to stay on awhile to help manage the company. If your goal is to sell now and walk away, this type of acquisition may not be in your best interests.
Are the Market Conditions Favorable for a Buyer?
Market conditions play a major role in whether or not an acquirer is interested in your business. If other companies in your industry are flush with cash, they may invest in new opportunities. If you are willing to sell, you can probably get what your business is worth from a buyer.
During good economic times, nearly every industry sees at least a little growth, making your business look more robust. A potential acquirer is more easily able to afford buying other businesses.
Even during bad economic times, an acquirer may still see your business as an opportunity worth the investment. A company with plenty of cash on hand may choose to go on a buying spree in order to pick up businesses that will realize a healthy ROI once the market turns around.