Topic 14

Pay for Inherent Capabilities Only

Topic 14 discusses the necessity for buyers to focus their offers on the level of business capabilities existing in the business at the time of the acquisition and on the financial results related thereto. Projected seller financial results may be based on a much-expanded capability base that does not exist at the closing of the acquisition. Do not overpay.

THE BASKET OF CAPABILTIES ACQUIRED HAS A FINITE LIFE AND VALUE

  • The business and capabilities acquired at closing (hopefully) possess the potential to capture the benefits of a given level of “franchise” differentiation or competitive advantage resulting from the know-how, technology, and process advantage resident in the business at closing.
  • Presumably, the business acquired has a given franchise time frame (T) during which continued earnings, growth, superior returns, and value creation resulting from the acquired capabilities can occur. At the conclusion of that period, the franchise capability base will be somewhat diminished and returns would be no better than those of other competitors.1
  • Acquired franchise-creating capabilities existing at closing with duration longer than four to seven years would be exceptional; three to five years is more likely for most acquired franchise capabilities before the marketplace closes the gap and new generations of capability are required to maintain franchise level returns.
  • This is not to say a target has a three- to five-year life. It is ...

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