Platt Perspective on Business and Technology

Acquisitions and divestitures 6: exit strategies and the sale and acquisition of complete businesses 3

Posted in startups, strategy and planning by Timothy Platt on April 24, 2013

This is my sixth 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 358-362 for Parts 1-5.)

I began a discussion of exit strategy-based complete business divestitures in Part 4 where I introduced three test case scenarios that collectively illustrate some of the core issues involved here. To briefly recap and orient from there and for purpose of clarifying this posting, I repeat that:

• Scenario 1 represented sale of an established business by an owner who seeks to step away from it to retire.
• Scenario 2 represented 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.

I briefly addressed the issues of evaluating and selling a business according to Scenarios 1 and 3 in Part 5 and specifically recommend reviewing Parts 4 and 5 of this series as foundation material for what is to follow here. My goal for this posting is to at least briefly analyze and discuss Scenario 2 with its types of divestitures and acquisitions. And I begin there from an operationally and strategically lean and agile business development perspective. (See my two series: Virtualizing and Outsourcing Infrastructure at Business Strategy and Operations, postings 127 and loosely following for its Parts 1-10, and Moving Towards Dynamic Performance Based Business Models as can be found at Startups and Early Stage Businesses as postings 123 and loosely following for its Parts 1-8 for background materials and discussion on lean and agile business planning and execution per se.)

• An entrepreneur who moves in on a prospective unique value proposition with a goal of building a marketable business venture around it, plans and builds with one goal – to reliably and at minimal risk and upfront-cost, set up and build a business resource that can be sold off on a short timeframe when ready, and at a substantial profit.
• Operationally, the goal in that is to build well enough so that the offering put on the market would be an attractive buy that could be cost-effectively brought to market.
• And that means building this commodity enterprise to be stable and sound enough to develop and realize its unique value proposition, but with a very pronounced focus on developing and presenting just that.
• That means limiting to a minimum anything extraneous when planning and building, and with third party outsourcing or virtualization or other approaches applied as appropriate. The goal there is to limit both extraneous fixed operating expenses and the development of non-essential in-house supported resource base.

From the buyer’s and acquisitions side of this:

• Their goal in this is to limit the level of extraneous resource duplication and other cost expanders that they would have to buy, that they do not specifically need,
• In order to acquire and bring in the specific unique value proposition capability that this offering would bring to their own business in meetings its ongoing and long-term strategic needs.

What I am outlining here is a very business sales and divestiture, and acquisitions-oriented lean and agile approach. And here is where this type of exit strategy takes on a very specific meaning for newly forming business ventures as divestiture and acquisition objects:

• A whole range of business infrastructure systems and functionalities can reliably be expected to become essential that would in most cases be held in-house as a business expands and scales up,
• And the overall value and cost of all of this supporting structure can come to outweigh all but the most compelling unique value propositions for a potential acquiring business, making development from scratch and other options more viable alternatives to acquisition for gaining that specific source of unique value.
• And when businesses develop directly matching or at least directly competing alternatives to a unique value proposition that a potential acquisition holds, it ceases to be a unique value proposition and loses potential marketable value from that.
• But in many and even most cases supporting functional requirements are simpler and more easily handled on the side rather than by dedicated specialists when the headcount is still very small and business processes have not begun to expand in detailed complexity.
• So startup and early stage are the business stages where it is easiest to develop and offer a marketable business venture that is closest to being pure unique value proposition than at any other stage or time – before all of those supporting structures and systems have elaborated. So for reduced extraneous expenses, a unique value proposition can hold greater acquisition value at that stage.
• This, collectively, can make the build to sell serial entrepreneur model very successful and profitable and certainly for entrepreneurs deeply experienced in building and managing, and marketing and selling startups.

I am going to turn in my next series installment to consider resource divestiture as a fundamental component of change management, and of course correction when a business is in or at least rapidly approaching crisis. And as a foretaste to this, I note here that a big part of making that work is to strategically prepare and carry through this type of divestiture so as not to be caught in an entirely buyer’s market – and with a goal of realizing fair value for what is sold off. Meanwhile, you can find this and related postings at Business Strategy and Operations and at its continuation page: Business Strategy and Operations – 2. I have also included this series installment in Startups and Early Stage Businesses.

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