The Risk of Change to a Business Model Following Acquisition

Jun 25, 2019

The Seattle Seahawks employed an offensive business model from 2012 to 2015 that resulted in four consecutive years where the rushing offense was ranked in the top four in the NFL. The team consistently made the playoffs during the time period, and but for a deviation from the run emphasis business model the professional football franchise would have likely had bookend Super Bowl Championship trophies.  In 2016 & 2017, the team left this offensive business plan ranking 25th & 23rd in rushing offense and stopped being considered an elite team in the NFL. Last season, the team returned to the top of the rushing offense rankings in the NFL for the first time since 2014 and once again was considered a challenger for the Vince Lombardi Trophy.

Success in entrepreneurship, as in the NFL, is determined by a spectrum of factors. However, a component of achievement in both environments is focusing effort & resources on what you do best as an organization. The Seahawks stopped investing in their offensive line in 2016 & 2017 and run production by the offense fell on the field.  Last year, the team invested a #1 pick on a running back plus had experience and talent on the offensive line and productivity returned to a market leading level.

One of the motivating forces behind acquiring a privately held company is future opportunity.  Another is historical financial performance.  One thing that traditionally changes in a business sale in the middle or main street marketplaces is executive management, as the CEO is often also the company’s majority shareholder.  This results in the following mergers & acquisitions truism, “Executive management from the CEO office will be better or worse post transaction, it will not be exactly the same as when the former owner sat in the CEO chair”.

The balancing of maintaining the “status quo” that motivated the acquisition and justified the valuation for the business with executing on identified opportunities for the company can be difficult for a buyer post acquisition. It is a balance I have seen successfully managed with revenue, profitability, & market share growth and customer retention & acquisition. I have also seen business buyers lose key employees, customers, and vendors; change product mix & services; and expand too rapidly straining employees & resources post acquisition. If a “win-win” transaction was facilitated in an environment of full disclosure employing “best practices” the business buyer should own these outcomes because they were a direct result of their executive management.  Good or bad when you “buy” a vehicle its performance on the road is largely determined by the driver.

Most business sales facilitated by IBA sell for a 3 to 6 multiple of EBITDA.  These multiples convey attractive investment returns for a buyer.  A 3 multiple = a 33% return on investment, A 4 multiple = a 25% return on investment, a 5 multiple = a 20% return on investment, and a 6 multiple = a 17% return on investment.  Investments with these types of returns have significant risk.  Executive management ability can mitigate or increase risk.  That is why banks value relevant experience when assessing business acquisition financing opportunities.

A change of ownership can cause turbulence in a business model, if not handled properly.  Additional turbulence can be created by changing the business model after acquisition. It is my recommendation to all business buyers in IBA facilitated transactions that they engage the knowledge & experience of prior ownership as long as possible, even if it is simply the ability to talk on the phone or email, and make sure they thoroughly understand all components of a business and the interrelationships between the components before making a change in company strategy. Early in Pete Carroll’s career he gave the ball to Marshawn Lynch against the Saints in the playoffs and the team scored a touchdown that created an earthquake ( and had them walk off the field victorious in the playoffs.  I like, all members of the 12th Man, wish Coach Carroll had given the ball to #24 versus the Patriots in the Superbowl.  I am confident the outcome on the play would have been much more favorable.  I recommend all business buyers run the former owner’s play book with their personnel for six months to a year before making significant changes in the game plan.   Any other strategy diminishes the value paid for the intangible assets of the business.

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”.