Platt Perspective on Business and Technology

Acquisitions and divestitures 4: exit strategies and the sale and acquisition of complete businesses 1

Posted in strategy and planning by Timothy Platt on April 14, 2013

This is my fourth installment in a series in which I look at acquisitions and divestitures and related processes, and examine businesses from a very modular prospective as to how value is created and sustained (see Business Strategy and Operations – 2, postings 358-360 for Parts 1-3.)

So far I have focused in this series on businesses that acquire or sell off select functional parts of their infrastructure, according to an analytical understanding as to how they can both maximize realizable value in the here and now, and reduce ongoing expenses and risk that is disconnected or at least inefficiently connected from their sources of ongoing monetizable value and profitability. I turn in this installment to consider sale of the complete business, and in that context cite a brief but select set of working case study scenarios:

1. The owner of a business builds their enterprise from scratch, and to a point where it is an effectively profitable ongoing concern with a steady, reliable customer base and market-appreciated products that are generally viewed as being of high quality at a good price. But as time passes, this owner starts thinking about retirement. They want to move on in their life and to spend more time with their family and they want to travel more and to pursue some interests they have never had time for while building and running their business. So they begin thinking in terms of an exit strategy in which they would sell off and increase their retirement funds, as well as building a more substantial inheritance for their children.
2. An entrepreneur sets out to build a business around a new product idea that he sees as holding real value. But his goal is not to become a long-term owner and manager of this new enterprise. His goal is to build an attractive offering that another, larger business would want to acquire in order to fill a strategic gap in their systems – a gap that his business’ existence highlights specific awareness of. So he seeks to build to explicitly offer a saleable set of resources as a complete and ideally competitively attractive offering. Serial entrepreneurs who live, at least professionally for the startup and early stage processes and challenges and who are much less interested in the follow-through of running a business long-term tend to gravitate towards this approach, and they frequently invest significantly from what they bring in from the sale of one startup, in building their next venture.
3. An entrepreneur builds a business, taking it through the uncertain startup and early stage business steps. This is his baby and he is in it for the long haul. He invests what he can in it in personal funds and much more so in time and energy and emotional capital, and he builds solidly, creating a well-respected brand and real customer loyalty. Some of his product offerings are very cutting edge and some are more mainstream to what he does and he successfully scales this business up to a respectable level of annual business and profitability. He did not build this to sell it, and he is not thinking in terms of doing so – until he gets an eye popping offer from a large multinational corporation that really wants to capture the value of his company’s brand and products for their business, and access to his customer base. So suddenly he finds himself asking the question, and talking about his with his wife at home, as well as with his senior executive team and others at work. I have seen this type of scenario play out in a couple of variations depending on what is offered on the table – a straight cash and stock buyout, or a cash and stock plus continued involvement offer where the acquiring company would own outright, but the selling CEO owner would stay in-house for at least a transition period and then be on retainer as a consultant for some further period of time.

I have intentionally left out anything like hostile takeovers of publically traded companies here and am planning on addressing that and similar scenarios in a future installment. The scenarios that I would address here are all willing on everyone’s part even if not necessarily planned for, long-term by any of them. And they all revolve around sale of a complete business as a value creating acquisition and as the end point of an explicit exit strategy, even if it is one not always long planned for.

I am going to continue this discussion in my next series installment with an explicit balance sheet oriented discussion of costs, returns and valuations. As a foretaste of that I note here that any such analysis has to consider both immediate and short-term costs and returns created and received, and also longer term factors and consequences as this acquisition would impact upon ongoing strategic positioning and competitive strength. Meanwhile, you can find this and related postings at Business Strategy and Operations and at its continuation page: Business Strategy and Operations – 2.

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