As promised, over the coming months we will be posting various aspects on how buyers think. What motivates an acquirer? We want to share these insights to help owners understand the aspects of a business that a serial acquirer cherishes. Too many entrepreneurs are building unsaleable businesses that barely cover payroll and have a low probability of long term survival. There’s an easier way to make money AND build a valuable business that is also a liquid asset.
Today’s focus is legacy product dependency.
Why build a business that just makes money but ignores the increasing risk factors that undermines long term sustainability? Building a business that buyers will love is synonymous with building a long term sustainable business.
Legacy Product Dependency
An acquirer would measure this in several ways but the jugular approach is to first list all the of the target’s products sorted by year of launch. Then take the last 5 years of Revenue and profit attributed to those products. Have we got a legacy product dependency? In manufacturing businesses you would also look at the order book by products.
Let’s say this review indicates that around 75% of profits are coming from your top three products or services launched 5 or 10 years ago, what is the buyer thinking?
- Customers may be staying by inertia, not love, and is the target really still improving the life of their customers?
- How long can revenues and profits be sustained?
- Is this a maturing market that lacks innovation?
- Have profits been flattered by decreasing R&D spend?
- Has the target been leapfrogged by better technology?
- Is the codebase outdated?
- Has the technical knowledge to innovate left the building?
- What would it cost us to launch new products using the existing engineering team?
- Can we access the target’s customers and transform the growth?
- Are there more attractive targets with less dependency on older products?
It all adds up to buying a problem instead of a solution.
Acquirers are focused on the post-acquisition period when they have to make a success of the acquisition. Even if the legacy products or services are attractive, most acquirers will heavily discount the price because of the post-acquisition investment needed.
Lessons for Owners – Possible Solutions
- As you scale your business, always be measuring the dependency and relevance of your portfolio of products and services. From the recent past we were able to support the transition of a high-tech product manufacturing business dependant on products built and engineered years ago, to the launch of successful new products that dominated the revenue line the next year, just ahead of a sale to a public company.
- Constantly refresh your product roadmaps, highlighting new features being introduced and why.
- Build deep relationships with the technology teams of your major customers to share visions and potential new innovations that might be attractive to them.
- Constantly monitor competitors moves to spot opportunities worth testing.
- Look for ways of differentiating your product from the noise. It’s not always about AI (although you better have your story ready with proof points) but it could be about ease of use, for example check out Basecamp’s line of products.
- Innovation comes in many forms but whether you are a smaller or larger private company, to continue to add value, it’s imperative you build innovation into the fabric of the company. This is just as important in service businesses!
- Look at you internal processes as well. Is your order to cash protocol as efficient as it can be?
- Build smart Voice of the Customer systems that constantly connect with the customer for feedback at all levels?
- Revisit the problem your products were designed to solve and ask if your solution still valid? Has the problem changed? Is there a higher priority in your customer’s mind?
- And last but not least. Understand the customer’s customer. This drives your customer’s decision making.
Think like a buyer and start to address value leakage issues now.
The Portfolio Partnership has been transforming businesses alongside owners to create remarkable businesses since 2010. Operating partners to SMBs.
