Platt Perspective on Business and Technology

Acquisitions and divestitures 9: the value added acquisitions and divestitures business model

Posted in startups, strategy and planning by Timothy Platt on May 18, 2013

This is my ninth 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 and following for Parts 1-8.)

Early in this series I conceptually and operationally divided businesses built around acquisitions and divestitures trading, as fitting either of two fundamental business model patterns: the chop shop model and the value added model (see Part 8: the chop shop acquisitions and divestitures business model where I define both terms, and where I at least begin a discussion of the chop shop model and how it is most certainly seen as the public face for acquisitions and divestitures now, at least as of this writing.

I stated at the end of Part 8 that I would continue that discussion here, this time delving into at least the primary features of value added model businesses. And I do so here, by picking up on a scenario that I briefly touched upon in Part 8 where the acquisitions and divestitures per se consist of salvageable resources from a failing business that could not successfully recover through change management approaches and remediation.

• Admittedly oversimplifying here, a chop shop model business that acquires a failing company for saleable parts is not likely to attempt to turn it around to see if it can in fact be salvaged as an overall business concern.
• Premium would be placed on packaging, marketing and selling off anything of marketplace value and as quickly as possible, and at as little direct expense or risk (indirect expense) as possible to the acquisitions and divestitures business that sets up and manages – and profits from those transactions.
• A value added model business would calculate risk and benefits determination from a wider perspective and along a longer timeframe. If they could save the business and turn it around to be profitable again, the value receivable there might not be as high on a short-term basis as what could be realized from selling off the parts as scrap, but longer term value would in many cases be higher, and over time even considerably higher.
• Here, a salvaged business acquired by such a management and development oriented company, sees at least a potential worth considering of developing long term, new revenue streams. And a recovered business could always be spun off and sold and for a return on investment there too, if it did not fit into that acquisitions and divestitures portfolio of held resources or fit into its long term strategic plans or priorities.
• The basic approach is fundamentally different, with the value added business selling quickly if necessary, but also pursuing longer term investment strategies in what it acquires. And in this, the words “value added” become centrally important. The more an investment acquisition can be increased in marketable value and the more competitive a market can be developed for businesses and entrepreneurs who might want to acquire it, the higher the price point it can be marketed to and the more it can be successfully sold for.
• Here, the calculus of risk and benefits in play balances costs for preparing an acquisition to be profitably marketable and to some likely specific selling price range, against returns actually receivable after making that investment. And the goal is to develop a divestiture offering so as to realize the greatest possible profitable return on investment from it, and under circumstances where that greatest return on investment or at least a return close to it is most likely to be achieved.
• This can best be done by developing an acquisition to show significant value and even defining and distinguishing value for any business that acquires if from the value added model business. That is where competitive interest can be developed when divesting this repackaged and perhaps reorganized business asset, and that is where the greatest return on investment can be achieved.
• The chop shop business is quick to take out up-front service and related fees from any liquid assets available in an acquisition they take on. They in effect gut the business of its immediately available liquidity and then walk after extracting any other removable value. The value added model business seeks to increase value in what they acquire then sell off, creating new value for everyone involved – as that makes their transaction processes sustainable and supports long term gains.

It is easier to find acquisitions and divestitures businesses that run closer to the chop shop model as most businesses in general think and act short-term. Whatever their basic business models, more should think, plan and act with more of a long-term awareness.

I am going to finish this series here with this posting. 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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