9 Great Ways To Build Wealth As A Business Owner – Series (1 of 9)
This series of articles follows on from an article we published recently, titled “9 Great Ways To Build Wealth As A Business Owner”, where we mentioned that business owners who focus on building company value over company size, generally get to sell their businesses for a premium when the time comes to exit, allowing them to cash out the maximum with no regrets.
This article looks at Steve Murch’s story about VacationSpot.com and covers the 1st way – Start with the end in mind.
The travel industry has gone through two significant evolutions in the last thirty years. Our parents booked travel through an agent, but in the 1990s, websites like Expedia and Hotels.com became the standard.
The second major transformation in the travel industry was led by Steve Murch. In 1997 Murch was a Seattle-based software engineer leading the gaming division at Microsoft when he noticed a gap in the travel market. It was easy to use Expedia to book a hotel, but if you were looking for a villa, chalet, or private condominium online, you were out of luck. Murch imagined a website where vacation homeowners could list their location with pictures and a description. Travellers looking to stay somewhere other than a hotel could search for a private home or condo to rent.
In 1997, more than a decade before Airbnb would accelerate the travel industry’s second major transformation into the sharing economy, Murch launched VacationSpot.com to connect travelers with private vacation homes. As with any marketplace, Murch knew the key to his success would be solving the chicken or egg problem. Travelers would only use the site if there were enough variety of homes available, and owners would only list their property if there were enough traffic.
Rather than giving up most of his equity in a series of splashy but costly fund-raising rounds to get the money he would need to drive traffic, Murch approached Expedia with an idea. In return for exclusive access to Expedia’s users who came to the site looking to book accommodations other than a traditional hotel, Murch would give them 20% of his company.
Unbeknownst to Expedia, Murch had an ulterior motive for partnering with them. He knew they would make an excellent strategic acquirer for his business one day, which they became three years later, when Expedia bought VacationSpot.com for $87 million.
Had he gone the traditional route of most technology start-ups and sought venture capital funding, Murch would have swapped long-term wealth for the short-term fame that comes when a founder raises a substantial round of funding.
Start With The End In Mind
Value Builders like Murch begin thinking of their natural acquirers very early in their company’s lifecycle. They also understand the difference between a strategic and a financial acquirer.
The financial buyer purchases a business in return for a stream of profits; they are buying your future cash flow. Since most small business acquisitions are made by financial buyers that are merely looking for a return on the cash they invest, they often pay much less than a strategic acquirer.
The strategic buyer is acquiring a business for what it is worth in their hands. They have a set of assets that are made even more valuable through the acquisition of the target company.
Your business may be strategically valuable to another for a lot of reasons, but here are some of the most common. Owning your company will allow a strategic buyer to:
- Win more business from their competitors.
- Differentiate their offering.
- Enter a new market.
- Capture more market share and therefore raise prices and be more profitable.
- Improve profit margin by spreading their overhead across more revenue.
Even though you may be years away from selling, make a list of potential strategic acquirers for your company. Consider major strategic decisions through the lens of their impact on your list.
If you found this article of value, then feel free to read through two other series we’ve published recently:
- 8 Key Drivers Of Company Value That Every Business Owner Should Know
- Unpacking The Subscription Economy
If you want to see how your business scores in “8 Key Drivers of Company Value” right now, take 15-minutes to complete this survey and you’ll get a comprehensive 25+ page report benchmarking your business against its peers, plus 49 tips on how to improve those 8 key areas.