By Dave Raden
Principle, Capitus Group
Let’s talk about how to increase Corporate Value and decrease Business Risk?
In a recent article, I provided an overview of a 4-Step Transition Plan for your business:
- Options Assessment
- Strategy Selection
- Plan Execution. And then a following article discussed the first part of Discovery-Personal Transition Preparation.The second part of the Discovery step involves an objective evaluation of your company including understanding where the company lies in its lifecycle and what its value and risk parameters really are. It is very important to understand how to properly use Corporate Valuation Enhancement along with Business Risk Reduction concepts to ensure that you are achieving the personal ownership goals described in my previous article.Let’s start by understanding where your company is in its business lifecycle. Let’s define the stages as:
- Transition For today’s discussion we will assume that most companies looking to transition are not in the “Early” stage. But knowing what stage in which your company currently resides is important to know in to preparing for the final “Transition” stage. Below are specific challenges of the other three stages:
|Challenges||Profit/Value Strategy||Focus/Execution||Competitive Strategy||Reassessment|
|Resource Allocation||Infrastructure Development||Maintain and Optimize||Reconfiguration|
|Capital Requirements||Capital Structure Complexity||Maximize Capital Efficiency||Re-Evaluate Needs|
|Human Resources||Build Professional Mgmt. Team||Maximize HR Efficiency||Match to New Needs|
|Prod/Svc. Development||Expand Product Offering||Optimize Quality and Service||Create New Offerings|
|Systems||Scalable Systems w/ Metrics||Refine/Improve Systems||Match to new needs|
Please be aware that the lines between these three stages may overlap. For example, in a manufacturing company I owned in the flexible packaging industry, we were a mature 30 year old business growing top line revenue over 10%. But we were really in a Regeneration stage.
We had six color presses in a market demanding up to 10 color print capability. If we didn’t spend millions in the near future on new equipment, our business would be lost to our competition. Frankly we also needed to do significant work in all of the challenges above in blue under the Regeneration box.
At that point in time, while our historic revenue and EBITDA growth looked good, our business risk was high which could potentially negatively affect corporate value.
So to enhance value through risk reduction, a process of objective evaluation of the specific functional areas of business needs to be initiated. There are several tools that can be employed that range from using due diligence checklists to computerized models.
As an example of one such tool, we have found that a model developed by Kenneth J Sanginario of Corporate Value Metrics that is called the VOP, (Value Opportunity Profile), not only gives a current corporate value baseline but also designates risk areas that are stated in three levels of importance. Also, it provides guidance on the potential increase in corporate value if improvements are made. The specific issues that need improvement can then be incorporated in your business plan.
To utilize the VOP, you first enter financial information for at least three but preferably the last five years along with expected future growth potential.
Then over four hundred questions are posed to your management team in the following eight functional business areas:
This model was designed by corporate valuation experts so it gives a baseline valuation from the uploaded financial information and answers from your company team. While it then lists specific things that need improvement in a prioritized list, the developers realized that rarely can all of these be accomplished at once. You can “what if” the model with those issues you want to tackle first and see how much value improvement can occur with successful execution.
The take away after using a process to delineate where your company truly resides in its lifecycle. It helps you to develop a baseline value and examines current business risk along with some ways to reduce it. Further, it allows for better preparation to assess your transition options in Stage 2 of our process.
Whether you are beginning to prepare for a transition or just want to make your company more “saleable”, utilizing a formal process will help to enhance your EBITDA and reduce future business risk.
To quote Gary Miller of GEM Strategy Management, “Begin planning early, prepare your company to go to market, select an interdisciplinary team of experts who can work together, monitor the team with a lead consultant and execute the plan when the timing is right.
Planning to meet ownership goals is not something to start a few months before a potential exit. It is a process that can take from two to five years to successfully execute.
Next time we will explore Stage 2-Options Assessment. We will discuss how to put the right team together to make sure all viable options are put on the table that will best assure that ownership goals are met.
Note: If you have an interesting and/or educational CEO story of Head Noise caliber, write to me at firstname.lastname@example.org or to the author of this article, Dave Raden at email@example.com. I’d love to speak with you and share your story in my Head Noise blog. You can tell your story either on the record or, without attribution.
Cameron Bishop is a partner with The Capitus Group. The firm provides comprehensive business value enhancement and transition strategy solutions. Partners and Advisory Directors comprise an experienced team of business professionals who have successfully owned, run, grown and sold companies. Capitus utilizes proven value enhancement and risk reduction techniques to enable superior transition options.