IBA, as the premier business brokerage firm in the Pacific Northwest, is firmly established as a respected professional service firm in the legal, accounting, banking, mergers & acquisitions, real estate, and financial planning communities. Periodically, we will post guest blogs from professionals with knowledge to share for the good of owners of privately held companies & family owned businesses. The following blog article has been provided by Dave Nave & Paul Osborn of Balanced Hoshin (www.balancedhoshin.com):
Business Model Assessment in the Acquisition of a Business
No Business is Forever
The recent (as of September 2017) bankruptcy filing of Toys’R’Us, reminds us that no business is forever. Companies that were once extremely successful fail, and it happens all the time. Markets are constantly changing – what worked yesterday may not work tomorrow. Just ask Circuit City, Radio Shack, or Blockbuster.
Business Models are Theories of the World
Business models are theories of the world, and of how the business fits into that world. If you’ve ever started a business, you will know the importance of a business model. In this article we’ll talk about the three theories that all business models assume.
- A theory about how the market works.
- A theory about the company’s goals and purpose.
- A theory about the internal capabilities that are needed.
To be successful, these theories must (1) fit reality, (2) be consistent with each other, (3) be known and understood by everyone in the organization, (4) be tested constantly. Discovering a winning theory takes time, hard work, and not a small amount of luck. When companies get it right, they can be very successful indeed…that is until they’re not.
Business Models Don’t Stay True Forever
Successful business models don’t stay true forever – in fact they may not stay true long at all. A business model is a hypothesis about society, markets, customers, and technology – all of which are in a constant state of flux. Just because it has proved to be valid in the past does not mean that it will continue to be valid in the future.
Another source of the ‘failure’ of the business model is atrophy. After a company achieves its original mission, it is in danger of taking itself for granted unless it can find a new mission to aspire to. If the company remembers the answers but has forgotten the question, a successful model that was based on thought and discipline will degrade into mere ‘culture’. Culture is not substitute for discipline, and the theory of business is a discipline.
The Signs That A Business Model Might Be Obsolete
The first sign that a business model might be obsolete is often an unexpected failure – a tried and true strategy that has worked in the past suddenly stops working. However, even unexpected successes can also be signals that the business model is in trouble.
The initial response is to ignore such signs by dismissing the failures as simply bad luck or incompetence, and the successes as attributable to skill. The second response is invariably to tinker with inconsequential details, while keeping the basic business model unchanged. Such efforts merely postpone the inevitable decline.
Two Ways to Keep Your Business Model Valid
What should be done to keep the business model valid and alive? Good places to start are to look at noncustomers, and to do periodic reviews of all the company’s products and activities.
- Noncustomers. A noncustomer is anyone who is not doing business with you. Noncustomers will always be able to tell you far more about how the market is changing than your customers will. By asking where the noncustomers are going, and how has their behavior changed, you may be able to detect the flaws in the assumptions behind your own business model.
- Periodic Reviews. Every few years assess all of the products and services being offered, and ask ‘if we weren’t in this business already, would we get in to it now?’ Walking away from a large physical or emotional investment, particularly if it has been successful in the past, is one of the hardest things in business you can do and takes merciless objectivity. However it is a truism that if you don’t aggressively manage your own products, then your competitors will do it for you.
Reevaluate the Business Model Before Buying the Business
As we have explored above, no business lasts forever, and past success is not a guarantee of future results. Toys’R’Us are just the latest proof of this business truth. What made the company successful in the past can easily cease to work in the market. Customers’ habits and preferences change, competitive environments shift, and technology evolves. Companies that do not recognize this in time, and take drastic action to reinvent themselves, will die sooner or later.
Therefore, before you buy a company, of course you should first understand why the business has been successful in the past. But then you should go further, and look carefully for signs that the assumptions behind the original business model are still valid. You can do this by looking at noncustomers to detect early signs of change and broader trends in the market.
Also, don’t assume that the company’s products or services are the right ones that will carry you to tomorrow. Question all of the product lines that the company is engaged in, and ask whether they are products of the past, or of the future. Look at the three components of the theory of the business theory– the market assumptions, the company’s goals, and the internal capabilities, and evaluate whether they are still a fit. If not, coming up with a new model is possible, but it invariably takes hard work and careful analysis…caveat emptor – buyer beware!
Dave Nave with Paul Osborn are the creators of The Balanced Hoshin Adaptive Business Planning System. They help companies that need to get things done to define, communicate, and execute successful business plans. If you have questions about this article or the services Balanced Hoshin (www.balancedhoshin.com) provides its clients please contact Dave Nave at (206) 200-4840 (email@example.com) or Paul Osborn at (425) 605-7707 (firstname.lastname@example.org).
IBA, the Pacific Northwest’s premier business brokerage firm since 1975, is available as an information resource to the media, business brokerage, and mergers & acquisitions community on subjects relevant to the purchase & sale of privately held companies and family owned businesses. IBA is recognized as one of the best business brokerage firms in the nation based on its long track record of successfully negotiating “win-win” business sale transactions in environments of full disclosure employing “best practices”.