Which Value Drivers Need Attention First?
Once you’ve chosen an exit date, your attention should turn to value drivers – those activities, capabilities, or qualities that add worth to your company and that are under your control. Adding worth
includes increasing profitability, reducing risk, and promoting growth consistent with your strategic goals. Optimizing performance in key areas of your business will not only help you get top dollar for the purchase of your business, should you sell to a third party, but will ensure the sustainability and growth of your business if you transfer to insiders.
But which value drivers should you focus on first? To identify those that need work, ask questions of yourself in addition to interviewing your leadership and financial teams.
- Which value drivers are working and why?
- Which ones are not working and why not?
- Where are we bleeding the most?
- What needs to be done to get those value drivers working for you?
To assess where you stand, review the top ten value drivers, which are listed below, along with some of the elements that influence the performance of that value driver. Consider each from both a qualitative and quantitative perspective. Then develop an action plan to address those that fall short.
#1 - Stable, Motivated Management and High Performing Workforce
As a general rule, workforce is the number one value driver. A company’s people are the heart of an organization.
- The company is not owner-centric or dependent
- The knowledge, skills, experience, training, and creative abilities employees bring to the business
- Management talent
- Growth potential
- “Golden-handcuffs” long term compensation and retention systems
- Bonus system that works for your company
- Engaged and well–trained workforce
- Depth and diversity of workforce
- Articulated purpose, core values, and BHAG
- For key employees – non-compete agreements, stay bonuses
- A healthy company culture
#2 - Systems that sustain the growth of the business
- Sales and marketing systems and processes
- Sales and marketing tracking
- Honing the sales process – what do we have to do today to increase sales this year?
- Documented manufacturing processes and measures
- Documented service delivery processes and measures
- Human resource systems and processes; recruitment, retention, employee manual, employee communications
#3 – Established, diverse customer base
- Strong customer relationships, not dependent on owner
- Customer base stability and credit worthiness
- Customer size mix
- Recurring revenue from existing customers
- Growth trends of existing customers
- Opportunities with existing customers
- Customer turnover
- New customer attraction, growth and retention
- Percentage of business from existing customers – dependent on no single customer for more than 10% of revenue
- Effects of economic dependency
#4 – Appearance of facility consistent with asking price
- Facility appearances, organization, flow, etc.
- Maximized facility use
- Condition and useful life of existing assets
- Maintenance costs
- Capital expenditure requirements and reserves
- Facility audits – no surprises
- What does our facility say about who we are?
#5 – Realistic growth strategy
- Rate of growth vs. economy, marketplace and industry sector
- Goodwill: market position, brand awareness, identity, company reputation, USP, product/service reliability, customer satisfaction
- Previous two to three years’ business performance
- Near and long term documented strategic and tactical growth plans
- New market and product/service opportunities
- Vendor/supplier relationships
- Favorable financial relationships
#6 – Effective, documented financial controls
- Financial systems and processes that produce accurate, reliable, timely reports
- Optimized timing of financial reporting
- Key Performance Indicators – what does your “Dash Board” look like?
- Use of Trailing Indicators
- Use of Leading Indicators
- Key Financial Ratios
- Compliance with all tax and reporting requirements
#7 – Business overview
- Use and timing of the “legal audit”
- Well-managed bank relationship
- Effects and normalization of Related Party Activity
#8 – Financial growth, cash flow, profitability, revenue, low debt
- Cashflow including projections
- Profitability including Gross Margin and Net Margin growth
- Comparisons to industry sector
- Revenue and percentage of that which is recurring
- Proper capitalization – low debt
- Management of excess cash
- Proper use of a budget
#9 – Attractive business sector
- Healthy, high growth industry
- Expanding industry
- Competition within industry
- Diversity of industry sectors served
#10 – Protected technology/IP
- Trademarks, patents, copyrights
- Property processes to generate business
- Intangible assets
- Barriers to competition
- Technological competitive advantages
- Website and internet presence
- Information technology current with leading standards
- Proprietary products or services
- Licenses, permits, regulatory approvals
Preparing your company for sale or transition takes a number of years if you intend to obtain maximum value for the time and hard work you’ve put into your company. Ongoing assessment of your value drivers is integral to its success and will not only improve the value of the company but will yield a profitable and more efficient company in both the long and short term. I’d welcome the opportunity to help you identify your most critical value drivers, assess their status, and develop a plan to address those that need improvement. Contact me to discuss your specific situation.
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The information contained in this article is general in nature and is not legal, tax or financial advice. For information regarding your particular situation, contact an attorney or a tax or financial professional. The information in this newsletter is provided with the understanding that it does not render legal, accounting, tax or financial advice. In specific cases, clients should consult their legal, accounting, tax or financial professional. This article is not intended to give
advice or to represent our firm as being qualified to give advice in all areas of professional services. Exit Planning is a discipline that typically requires the collaboration of multiple professional advisors. To the extent that our firm does not have the expertise required on a particular matter, we will always work closely with you to help you gain access to the resources and professional advice that you need.
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Any examples provided are hypothetical and for illustrative purposes only. Examples include fictitious names and do not represent any particular person or entity.