Selling Out Part 3: The Decision Tree

“Selling out” Part 3: Surviving Profit Optimisers and the Decision Tree. ?

As someone once told me, working for a PE-owned business is like being in the army: people tell you when to wake up, when to use the toilet, and what to eat. It gives the comfort of operational clarity, but it’s not for everyone.

In the previous posts, I introduced the three types of corporate buyers and when they are the best fit for your exit:

1.????Corporate Venture Builders: if you are staying for another 3+ years and want to accelerate and de-risk independent growth.

2.????Business Integrators: if you want a gradual (1-3 years) transition and your product closes a meaningful gap in a core proposition of a larger business.

3.????Profitability Optimisers: when are ready to give the reins to someone else and when operational excellence (not vision or strategy) is the key priority.

Who are the Profitability Optimisers and why this might be the right exit for your business?

There are different types of companies that act as a Profitability Optimising buyer:

?-??????Private Equity companies are the most well-known examples, with (depending on the industry) roughly a 4-year horizon for improving profitability and business operations and exiting the business again.

?-??????Another type of a Profit Optimising buyer is a large company with a “bolt-on” acquisition strategy, who buys and streamlines similar businesses across multiple markets to reap the benefits of scale, but unlike the PE buyer intends to hold their acquisitions in the long term.

A Profitability Optimiser can be a great owner for a business that has a clear and stable business model but experiences sizeable operational inefficiencies due to lack of scale or lack of experience at the top leadership level. ?An experienced team and a structured approach to improving operations can maximise the value of such a business.

This is the acquisition strategy most common in the industries with significant production lines, where op-ex and benefits of scale directly translate into profitability gains. Coca-Cola, Dupont, Akzo-Nobel are all examples of the companies successfully employing bolt-on acquisition approach. There are interesting examples within the Software and Consumer Internet industries where this has been attempted.

What are the implications for my business? ?

If your business is serving a small market but its business model and product proposition are (near) identical to a larger multi-country competitor, a great way forward could be a bolt-on acquisition. The larger buyer provides the benefits of scale and excellence in operations that increase the profit margins, as well as the safety of a well-capitalised owner. For the buyer, this in an accelerated way of increasing market share and securing competitive position.

?Note the difference from the Business Integrator case, where a unique product can strengthen and evolve the buyer’s proposition. In the case of Profit Optimisers, the key benefit is more “mechanical”: increasing profitability of essentially the same business proposition through operational levers.

What to expect?

-??????Expect a lot of detailed instructions: like in the “army” quote at the beginning of this post, the buyer will use their operational playbook to convert your business and its operations towards their blueprint of excellence.

-??????Expect very detailed supervision on the financials. No spend will be too small to be reviewed and questioned. All budgets will be zero-based. “This is last year’s baseline plus X%” is no longer a valid budget input.

-??????Expect to see movements and results - fast. This is one of the magical things about such an acquisition when done well: things start really moving. Daily operations get better, decision-making simplifies, profitability increases. This will give good energy to the team from seeing the fruits of their efforts.

What NOT to expect?

-??????There won’t be vision, mission, or strategy discussions happening for a while after the acquisition. ?The focus will be very operational and tactical. It will be about improving what is already in place and what is already known (business model, back-office operations).

?-??????Step-by-step optimisation of the existing business and product will take precedence over investing into new business development or high-stakes experiments. If you have big hypotheses to prove, do that before the acquisition – not after.

When is a Profit Optimiser the right buyer for me? ?

-??????If your market is small and the business model identical to that of a larger competitor, becoming a bolt-on acquisition can maximise company value through the benefits of scale.

-??????If your business model is clear, the key path towards profitability is excellence in operations, and you for whatever reason are not the right leader to deliver it, a PE exit can be a great option for value maximisation.?

When is a Business Integrator NOT the right buyer for me? ?

-??????If you are not ready to follow detailed instructions or leave the company – you should not sell it to a Profit Maximiser.

-??????If your strategy and business model are going through a significant transformation, no operational excellence playbook will make your business great without addressing the core strategic topics first. A Profit Maximiser is not the right buyer in this case.

-??????Finally, Profit Maximisers pay relatively low multiples for their acquisitions since they do not include vague “strategic synergies” into the valuation methodology. If you believe that sticking around and contributing strategically to your business post-acquisition will create additional value, a different type of a buyer is a better match.

In summary, the decision tree for selling depends on two big factors: your business outlook, and your own personal leadership horizon.

Below, I have drawn a simplified decision-making tree when it comes to the decision to sell (or not to sell your business).

Interested to apply this to your own decision making? Need sparring or support? Do reach out.

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