Platt Perspective on Business and Technology

Acquisitions and divestitures 5: exit strategies and the sale and acquisition of complete businesses 2

Posted in strategy and planning by Timothy Platt on April 19, 2013

This is my fifth 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 358-361 for Parts 1-4.)

My goal for this posting is to flesh out something of the How of selling, and from real awareness of the perspective of the other side of the table and acquiring a business that is being offered on the market as an end point of an explicit exit strategy. I began this in Part 4 where I laid out a set of three orienting scenarios that display differing circumstances and contexts through which this decision to divest can arise. And as noted at the end of that posting, my goal here is to discuss this process from the perspective of a very balance sheet oriented approach as to costs, returns and valuations.

I want to begin that and set the stage for this discussion by way of an analogous example – the sale of a home that the sellers: Bob and Mary, and their family have lived in.

1. Bob and Mary do some homework and find out what comparable houses in their neighborhood are being offered for when put up for sale, how long they stay on the market before being successfully sold, and what they tend to actually sell for.
2. They assess their own needs – they want to purchase a somewhat larger house in their case, but for the purpose of this example the precise details are not as important as is the simple fact of their having specific goals and strategic objectives. They assess their resources – they are going to have to sign a new mortgage as well as all of the rest of the paperwork and want to make sure that the sum total of their mortgage payments plus any other expenses related to their purchase stay within their own budget planning parameters. This means assessing what they would need to receive in payment for their old house and it also means coordinately considering what they will have to pay for any new home too, up-front repairs and so on included, so the numbers on both ends of this process work for them.
3. Their old house shows the wear of use and they find themselves asking both each other and their real estate broker they are listed with, what if anything they should do to fix up their house to make it more saleable. And their bathrooms are out of date as is their kitchen, and some of their rooms show paint scuffs and similar problems – and one of the bedrooms is painted in what some might consider an off-putting pink color. Strategically, they find that it would not be cost-effective to update the bathrooms or kitchen as those are the types of detail work that new home owners like to personalize to their own taste in making their new home their own. The expense to the seller would not be recouped for their doing this from increased realized sales price. But going through and painting interior rooms, and certainly that pink bedroom in a neutral white would both increase sales price received and shorten the time their old house stays on the market. So this would be a cost-effective step for them.

I am going to end this analogous example there with those details in place and turn to apply some of the same reasoning to the three scenarios of Part 4.

1. In all three scenarios, both potential sellers and potential buyers should assess what a divestiture-offering business has as assets and liabilities so they know what its likely overall net worth would be. And in keeping with the logic of the first bullet point of the home sale analogy, they should get a sense of what the market would bear for this. Here, depending on both the overall economy and on marketplace and other pressures in their industry, a business offering might be expected to be overvalued, undervalued, or more or less accurately valued in comparison to what would be expected in a neutral, stable market. This would, for either the homeowner or business owner, help them to determine wither to proceed with plans to sell or not and it would inform any prospective buyer whether it would make more sense to buy this business or to find alternative approaches for meeting their ongoing operational and strategic needs.
2. Point 1 above addressed issues of what is possible. Point 2 addresses the issues of what is needed, and within what time frame.
3. And Point 3 specifically addresses the key points of difference between the three scenarios of Part 4 of this series, and how any proposed business divestiture would be planned for and prepared for so as to maximize profits to the seller, by maximizing attractiveness and perceivable value to any buyer.

Briefly recapping those scenarios here for orientation in this discussion, Scenario 1 represents sale of an established business by an owner who seeks to step away from it to retire. Scenario 2 represents sale by a serial entrepreneur who builds out new businesses to sell them and with that exit strategy built in as their default, essentially from the beginning. Scenario 3 arises when a business owner gets that offer that they cannot refuse and decides to sell because of it.

Starting with the simplest case for Point 3 issues, with the third Scenario – it would be foolish for the seller to change or update anything as their prospective buyer clearly wants to acquire this offering exactly as it is, operational and fixed-resource asset equivalents of scuffed wall paint and all.

A Scenario 1 seller would quite possibly want to selectively update and improve at least some operational process and physical resource-based assets to make their business a more competitively attractive offering. Here, they need to know what a prospective buyer would look for as sources of value in their business, and where they might see due diligence or up-front cost disincentives that would at the very least prompt them to limit what they would pay in a final offer. This would in many cases be based on meeting industry standards, or exceeding them where unique sources of competitive value are in place in the business for sale. But exactly as is the case with the house seller, their goal would be to limit any improvements made to those that would bring in a positive return on investment in the form of increased sales price, faster and more reliable sale or both. There and just looking at building the sales attractiveness of their offering, if they could bring their business to a point where potentially acquiring businesses would offer more in order to preclude competitive buyers, that would be best. But they would not, for example, want to upgrade their employee cafeteria if that would cost them but not influence any realizable sales price. And to follow through on that, if repainting their cafeteria would not improve their value or saleability, de-duplicating, updating and data cleansing their customer database might, and particularly if their customer loyalty and reach constitutes one of their defining sources of competitive value. What would be done here and how, and how this would be marketed should be considered significant strategic decision points in this business process.

The reasoning of Point 3 of the home sale analogy becomes more interesting and I add more complex when you consider it in the context of a Scenario 2 divestiture, and for businesses that are in effect built primarily to be sold off for profit. I am going to delve into some of the issues that would arise there in my next series installment. 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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