A business with strong Value Drivers can demand (and receive) a higher multiple on the same amount of EBITDA than can a company with average Value Drivers. Value Drivers are specific business characteristics that drive growth. While each business is unique, there are nine characteristics that sophisticated buyers (e.g., strategic buyers, private equity firms) look for when evaluating business value.
A recent survey of exit planning advisors identified Next-level Management as the “Mother of all Value Drivers (MOAVD)”. Reminded me of the movie ‘Under Siege 2: Dark Territory’, when the lead mercenary sternly chastised his team with, “Assumption is the mother of all screw ups.” However, more relevant to this post is a quote that came later in the movie by the same character, “Chance favors the prepared mind!” Adapted for this post… “Valuation favors the prepared business!”
Next-level management is indeed the Mother of All Value Drivers (MOAVD). The management team you start to build today, including an experienced fractional CFO, will be the team overseeing the growth of the business and in the other areas that drive value for the business. Not only do you have to attract and hire this management team, but then they must also retain them through the transition of ownership. This can be accomplished through well-thought-out incentive plans.
This is not to say that your current management team couldn’t bridge the gap between where the business currently is and where it needs to be to sell. With proper mentoring by an experienced hand – and incentives – the current team in place could be the trusted team to help achieve your business goals. However, let’s face it, most entrepreneurs don’t have the time or the inclination to be that mentor. Unless you’ve got an experienced co-pilot, there really is no time to mentor and develop talent for the next level. You really need someone who can come aboard and begin immediately to improve value. Small business owners can even utilize fractional c-Suite help for next-level management.
Other Value Drivers
With your next-level management team in place, these are the other eight value drivers identified by exit planning advisors as being the most critical to address.
Improving Cash Flow
Enter an experienced CFO who can help business owners think of creative ways to improve cash flow in their business today. Ways to operate the business more efficiently: increase productivity and decrease costs. This Value Driver alone may not allow to achieve your objectives, but it’s a place to start for building a strong foundation. The success of this Value Driver heavily depends on the operation of the other Value Drivers.
Financial Foresight and Controls
Many companies lack reliable financial reporting to the extent that buyers can’t determine what the company has or track the source of its revenue. This is a common problem our fractional CFOs work on correcting. To potential buyers, sloppy financial reporting indicates other underlying problems, increasing the risk of the sale and often lowering multiples if there is an offer.
Another factor that plays a part is that without proper forecasting, the current stakeholders, key employees, management team, original owner, and new owner have very limited insights into the strategic growth plan. Again, something our CFOs typically focus on.
Operating Systems Demonstrated to Increase Cash Flow Sustainability
The establishment and documentation of standard business procedures and systems demonstrate to potential buyers that a business can maintain profitability after the sale and after the original owner leaves.
Could the business improve its profit margins if it increased its revenue? This is often a focus of our fractional CFOs, finding opportunities to improve – and document for buyers – scalability of the business model.
Diversified Customer Base
Potential buyers typically look for a customer base in which no single client accounts for more than 10% of total sales. The company could be considered a high-risk investment if a few of the top customers generate more than 40% of the company’s overall revenue.
Proven Growth Strategy
Developing a growth strategy helps attract potential buyers. A growth strategy could consist of the development of new product lines or augmenting existing ones, market plans, growth through the acquisition of other companies, expansion into new territories, or increasing manufacturing capabilities.
Recurring Revenue That is Sustainable and Resistant to Commoditization
It goes without saying that sustainable recurring revenue is a highly valued driver for any buyer. Having pricing margins resistant to commoditization is another significant opportunity for business owners.
Competitive advantage is the product or service that a company offers that is better or cheaper than its competitor. Find out why your customers buy from you instead of your competitors and publicize this. Demonstrate you know your marketplace and have the ability to take advantage of that knowledge.
Start Planning Today!
Rome was not built in a day, nor is transferable value. Having seasoned next-level management or trusted advisors will put you in a much better position to tackle and improve on the other 8 value drivers. The sooner you start on creating and growing transferable value within your business, the better.
Michael Stier is an Area President for FocusCFO based in Charlotte, NC.
Founded in 2001, FocusCFO is the leading onsite fractional CFO services provider in the Midwest and Southeast. FocusCFO works closely with small to medium sized businesses helping business owners gain control over three key financial and operational areas: increasing cash flow, reducing business risk, and creating a platform for scalable growth. This allows business owners to then realize full financial control and increased value in their businesses. For more information, follow us on LinkedIn.