In diligence, we have to get a strong handle on what the losses from the extraction could be so that they can be factored into the valuation model, the negotiation (to secure the piece parts that matter or an appropriate concession, and likewise to not pay for parts that won’t matter so much), and for the construction of an effective 100-day plan.
One way we recommend getting at part of this analysis is to link key customers’ (defined as both the asset’s most valuable ones today, and the most desired non-customers) Drivers of Choice and associated brand equity to the operational construct of the business.
These diligence assignments therefore require smart probing questions and scenario building with customers to understand, by example:
- Why customers believe the asset is winning (e.g., rate and quality of innovation)?
- What enables the asset to win in that regard (e.g., customer intimacy, ethnography, R&D capability, Marketing)?
- Where does the capability lie within the target’s organization – and to what extent does the capability leverage skills, resources and activity of the parent “mothership?”
- What do customers perceive about what enables the asset to perform on the specific Driver of Choice?
In diligence, when we address a carve out, we:
- Take the 11 individual factors in our Drivers of Choice framework (e.g., Quality and Durability, Product Portfolio Breadth, Reputation for Innovation, Reputation for Integrity, etc.) and determine the specific links that exist within the operational construct of the asset (i.e., connecting the driver of choice to the operational capabilities); and
- Examine to what extent the truly important and valuable skills reside in the carved out asset versus existing back in the mothership.