{"id":514,"date":"2018-12-23T22:31:56","date_gmt":"2018-12-23T22:31:56","guid":{"rendered":"https:\/\/mattersgraph.com\/?post_type=insight&p=514"},"modified":"2026-04-09T01:31:22","modified_gmt":"2026-04-09T01:31:22","slug":"value-gen-transitioning-the-core-business","status":"publish","type":"insight","link":"https:\/\/mattersgraph.com\/de\/insights\/value-gen-transitioning-the-core-business\/","title":{"rendered":"015: Value Gen: Transitioning the Core Business"},"content":{"rendered":"

In search of higher multiples, investors and their advisors are increasingly pressuring companies to transition their core business to match \u201cthemes\u201d that earn higher valuations.<\/p>\n\n

For instance, businesses that would rightly be described as professional services with just a hint <\/em>of a technology base \u2013 such as a staffing service with a proprietary database \u2013 become \u201ctechnology enabled business services.\u201d A transition can be extraordinarily valuable if completed successfully. The question for prospective acquirers is how you can tell when a company is transitioning its core business.<\/p><\/div>\n\n

\n\n

We start by defining three different types of businesses<\/span><\/h2>\n\n
    \n
  • Core businesses <\/strong>involve three factors:
      \n
    1. It is what customers, distributors or other partners will tell you the company \u201cstands for\u201d<\/li>\n\n\n\n
    2. It is nearly always the area in the business that generates the highest cumulative per-customer profit (defined as Customer Lifetime Value minus Customer Acquisition Cost)<\/li>\n<\/ol><\/li>\n<\/ul>\n\n
        \n
      • Non-core businesses <\/strong>will never scale relative to the core business, either because they are dependent on the core business or because they are otherwise growth-constrained<\/li>\n\n\n\n
      • Prospective new-core businesses <\/strong>may not yet have scaled to rival the core business, but there is no good reason why they cannot<\/li>\n<\/ul>\n\n

        Of course, companies can grow to have multiple core businesses so not all discussions involve transitions; we are focusing on those cases where \u201cold core\u201d has truly become old and that a current management team is seeking to transition to a new-core business.<\/p>\n\n

        Successful transitions from core to new-core \u2013 IBM\u2019s transition into focusing on a professional services offering is a classic example \u2013 often take years of effort. Companies that shortcut the process tend to pay a price. To illustrate, take Netflix\u2019s decisions to split its rental-by-mail business from its burgeoning new-core streaming business in 2012. While CEO Reed Hastings clearly believed that the core business could be transformed overnight, enough customers still believed that Netflix = DVDs <\/em><\/strong>that their revolt caused Netflix to halt the split. It would essentially complete the split years later (to become dvd.netflix.com), but the core business first had to be slowly displaced by the new-core.<\/p>\n\n

        In advising prospective investors, we ask two questions<\/span><\/h2>\n\n
          \n
        1. Is this an attractive new-core business?<\/strong><\/strong>
          Here are five determinants of core business value (as outlined in our 2018 Diligence Matters\u00ae toolkit):<\/em>
            \n
          • How significant of a problem does the business solve?<\/li>\n\n\n\n
          • What gives the company the authority to solve the problem successfully?<\/li>\n\n\n\n
          • Is there anything that threatens the problem?<\/li>\n\n\n\n
          • Is there anything that threatens the solution?<\/li>\n\n\n\n
          • Is there anything that threatens the economics?<\/li>\n<\/ul><\/li>\n<\/ol>\n\n
              \n
            • <\/li>\n<\/ul>\n\n
                \n
              1. How quickly can the company transition to the new-core business?<\/strong>
                Multiple factors can increase the speed with which a company makes the transition:<\/em>
                  \n
                • High demand and low adoption hurdles for the new business as it addresses a significant challenge<\/li>\n\n\n\n
                • The new-core business enjoying weak competition or high differentiation in its market segment<\/li>\n\n\n\n
                • High overlap in customer segments between offerings<\/li>\n\n\n\n
                • High ability for the new core to be \u201csold into\u201d the same situations as the old core and therefore ultimately displace the old core \u2013 for example, when customers or distributors place the products in the same consideration set or budget<\/li>\n\n\n\n
                • Well-conceived and aggressive transition plans for the old core<\/li>\n<\/ul><\/li>\n<\/ol>\n\n

                  Whenever we evaluate a business in transition, we always challenge ourselves to carefully define the core business today, and the new-core that is targeted. We ask ourselves, how quickly is the business prepared to make that transition? And, can a new owner and management team increase the speed as part of the value gen plan?<\/p>","protected":false},"excerpt":{"rendered":"

                  In search of higher multiples, investors and their advisors are increasingly pressuring companies to transition their core business to match \u201cthemes\u201d that earn higher valuations. 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