Platt Perspective on Business and Technology

Planning for and building the right business model 101 – 16: exit strategies, entrance strategies and significant business transitions 6

Posted in startups, strategy and planning by Timothy Platt on December 30, 2015

This is my 16th posting to a series that addresses the issues of planning for and developing the right business model, and both for initial small business needs and for scalability and capacity to evolve from there (see Business Strategy and Operations – 3, postings 499 and loosely following for Parts 1-15.) I also include this series in my Startups and Early Stage Businesses directory and its Page 2 continuation.

I have been successively discussing a series of strategies for exiting the startup and early, pre-consistent profitability stages of a new business’ development (see Parts 11-15.) And I continue that here with consideration of a fourth such scenario as initially presented in Part 11, at least in the context of this series:

• Selling your business for incorporation into another, probably larger business through merger and acquisition processes.

And I begin this by noting that I have met and worked with a couple of serial entrepreneurs who have explicitly and intentionally founded new businesses with a goal from the start of developing resources that they can turn around and sell off, pocketing any profits that they can develop through this, net of all development expenses that they have invested into these efforts. But this is also a strategy that business founders can find themselves facing and considering as a much less expected possibility too, and only as their new businesses have started to become profitable, because for example an already established business approaches them and seeks to buy them out as a strategic investment in their own future.

In that case, the founders of a business, in all likelihood have been building it with intention of holding onto it and running it long-term. But they are sitting on some proprietarily held source of value that other businesses would see as essential for their remaining competitive and profitable too. And at least one would-be acquiring business sees enough value in bringing this new innovator business and its assets into their in-house system to more than cover their costs from making this acquisition. This type of situation can even lead to what amounts to bidding wars with two or more, larger and more established businesses making competing offers.

Regardless of founder and owner intent in a startup or early stage business, this basic scenario can only work if that new business holds what amounts to exclusive ownership control over a source of value that is unique for what it offers, and that cannot readily, cost effectively be worked around through development of similar end-result alternatives. Most of the time, that means some disruptively new product or production line technology that would be a real game changer for an entire industry sector, or even for an entire industry. And it has to be a source of value that would integrate smoothly into systems already in place for any acquiring business, and in ways that would create increased value for whatever system of products or services that they were already offering. Established businesses would seek to acquire such a source of innovation because it and its value defining innovation would fit into and support what they were already doing, and in a manner that would increase their market share and profitability, and in ways their competition could not easily match, at least within any near-term timeframe.

The entrepreneurs who I have met who start and build businesses with a goal of selling them off, either through acquisition processes and to a larger business or to new owners as a stand-alone business, have had one special quality in common: an acute eye for what might be seen as bottleneck innovations: innovations that hold transformative potential for industries and for marketplaces, but that could be controlled and owned by one enterprise through patent or other proprietary rights protective measures, preventing at least legal use by other businesses.

And of course if a business’ founders find themselves holding ownership control over this type of innovation, as a defining virtue of their new enterprise, other businesses that see overriding need for it for their own operations might step in as noted above to try to acquire too – and even if that exit strategy was never even considered as a possibility in setting up or building this business.

Let’s consider the implications of this exit strategy from the perspective of what an innovative startups’ founders would do in building it. And to keep this discussion simple and clean, let’s focus here on startups founded by serial entrepreneurs who might be willing to hold onto and develop a new business venture as an ongoing investment, but who long-term always seek to build and then sell off. Venture capitalists seek to invest, develop a profit from their investments, and then sell off and move on. Let’s focus here on their business founder counterparts. Founders who find themselves facing an opportunity to sell off their new business but who have planned on holding onto it and running it long-term as their primary overall strategic goal, will have build and prioritized as if they were simply going to follow that basic default new business approach. And they will have actively sought to develop a flexibly well-rounded business with that in mind. What might entrepreneurs do, who in fact intend to build to sell, and to move on?

• Their goal is to build a marketable framework for the disruptive innovation that they hold ownership of, or that they can gain such ownership of, that will make their new business an attractive target for acquisition. (Here, when I note “or that they can gain such ownership of,” think in terms of business development entrepreneurs who would approach an inventor and bring them into a business that they would develop around their new innovation.)

This means their building a real business that would hold genuine prospects for success as a stand-alone, ongoing enterprise. But it means building and marketing, not just to an end-user consumer market but to a business-to-business market as well – and even primarily with that audience in mind.

This means, among other things, their not entering into contractually binding supply chain agreements or other arrangements that might complicate sale of this new business to a larger outside business that might have conflicting agreements already in place. This might even mean building with a specific prospective buyer in mind.

This means setting business development goals and priorities that would, when realized, make it easier and more risk-free for an acquiring business to buy out and acquire. And it would mean building so as to make integration of this new business into a larger organization appear to be easier to achieve, as a prospective buyer does their due diligence analysis of such a possible move. And that would both make an acquisition on their part seem a more attractive business proposition, and it would increase the perceived value of such an acquisition – and the amount that could be offered to buy, when calculated by an acquiring business net of direct costs and risk expenses of actually bringing this new resource into their business systems.

• These founders would, in short, build to both increase the likelihood of their being able to sell off their new venture, and at a greater profit.

I am going to shift directions in my next series installment to consider crowdfunding as a business development enabler, and after that I will discuss business and marketplace friction as this shapes both exit strategy planning and its execution. And in that, I will at least briefly address how this real world consideration can and does impact upon essentially any strategy that might be pursued in moving a new venture past its startup and early business stages.

Meanwhile, you can find this and related postings and series at Business Strategy and Operations – 3 and also at Page 1 and Page 2 of that directory. And you can find this and related material at my Startups and Early Stage Businesses directory too and at its Page 2 continuation.

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