Amazon and Google Are Buying. Is Your Startup a Good Target?

Last Updated Dec 16, 2010 12:07 PM EST

Big companies are on a buying spree. In the past few months, Amazon.com bought the parent company of Diapers.com and the deal-of-the-day website Woot.com; Google has been on a pace to acquire a new company every other week; and Gregg Blatt, CEO of IAC Interactive, the company behind Match.com and Ask.com, recently told CNBC he has his checkbook out looking to buy companies.

Here's the math on why big companies are buying businesses like yours:

Let's imagine a big public company -- let's call it Giant Corporation -- wants to buy your business that generates $1 million in earnings before interest, taxes, depreciation and amortization (EBITDA). Giant Corporation trades on the stock market for 16 x EBITDA, which means its $100 million in EBITDA gives it a market capitalization of $1.6 billion.

If it acquires your business for five times earnings, you get $5 million, but Giant Corporation tucks $1 million in earnings onto its profit-and-loss statement and gets a neat little bump in market capitalization of $16 million (your $1 million in EBITDA x its stock market multiple of 16 times). So Giant Corporation buys you for $5 million, and the next day its company is worth $16 million more, which is a deal bankers call "accretive."

As if that wasn't reason enough for big-company acquirers to go shopping, now look at where they often get the money to buy your business. Many of them have been issuing corporate bonds to investors at very low rates.

So let's imagine Giant Corporation dips into the cash it's borrowing at 5 percent (the return it offers corporate bond holders) to buy your company. Now instead of paying $5 million for your business, it's borrowing the $5 million at 5 percent and paying just $250,000 per year in interest. Now it's paying just $250,000 per year for your business that generates $1 million per year in profit. That's a 4x return on Giant Corporation's money to begin with, and it gets an immediate bump of $16 million in market capitalization.

If all these numbers are making your head spin, forget about the math and just understand the big picture: There has never been a better time to position your business to be acquired by a big company. If interest rates go up or the stock market crashes, your window of opportunity will have closed.

How to position your company to be acquired by a giant:
Amazon bought Diapers.com (and sister sites Soap.com and Beautybar.com) for $540 million because it liked the idea of adding new product lines as it diversifies further from books.

Can your company help another diversify its product line and sell more stuff to its customers?
Google acquired SocialDeck, a small Canadian company that creates games for social networks because Google wants to compete with Facebook in the social media space.

Can your little company help a big company play catch-up to one of its competitors?
Discovery Channel bought Treehugger.com for a reported $10 million so Discovery could sell advertising to people who want to reach Treehugger's 64,000 newsletter subscribers, 82,000 RSS feed subscribers and 3.5 million unique visitors per month (amounting to 10 million page views per month).

Can a big company take advantage of the traffic you get to your website?
If you can answer "yes" to one of those questions, you might just be an acquisition waiting to happen. But don't wait too long.


More from Built To Sell:

John Warrillow is the author of Built to Sell: Turn Your Business into One You Can Sell. He has started and exited four companies and was named one of America's most influential marketers by BtoB Magazine in 2008. Think you can sell your business? Take the Sellability Index Quiz.
Follow him on Twitter @JohnWarrillow Become a fan on Facebook

Flickr photo courtesy of Hello Turkey Toe, CC 2.0
  • John Warrillow

    John Warrillow is the author of Built to Sell: Turn Your Business into One You Can Sell. He has started and exited four companies. Most recently, he transformed Warrillow & Co. from a boutique consultancy into a recurring revenue model subscription business, which was acquired by The Corporate Executive Board. Watch this video to hear John's thoughts on starting and growing a business you can sell.

    John and his book "Built to Sell" have been featured in CNN, MSNBC, Time magazine and ABC News. John was recognized by BtoB Magazine's "Who's Who" list as one of America's most influential business-to-business marketers.

    John now divides his time between homes in Toronto, Canada, and Aix-en-Provence, France. He is a husband and father of two rambunctious boys.