As noted in An Introduction post, we’ve launched Gestalt Business Solutions to support owners and their teams as they build best-in-class businesses, because being best-in-class is good business strategy now and smart long-term-planning strategy. Gestalt focuses on strategic planning, fractional Integration and execution, value creation, and as applicable, transitions/transactions while My CFO continues to focus on fractional CFO and Finance and Accounting Advisory services and transaction support. Together, through My CFO and Gestalt, we work to support you in efforts to identify, protect, and maximize the value of your business.
In the previous post we listed the three areas of identify, protect, and maximize as our framework for the foundation to our work with business owners around becoming best-in-class. In a series of posts we’ll explore the strategic planning checklist and our approach to each of the three areas.
In the identify framework we focus on assessing the current value of the business and the areas (beyond sales performance) that add value to it. We start with understanding what you have.
Business Value Assessment: Research shows that the value of a business makes up 80% of the owner’s net worth, but many owners don’t know the value of the largest asset in their portfolio, their business. This is our starting place. Utilizing an interview, value tool, growth projections, and market data to provide an assessment of the range of value both for the business and the industry.
There are a few lenses to see value through, but the one we use is evaluating the business through the lens of an (eventual) strategic buyer, or the transferable value of the business. This value is determined utilizing two inputs: Financial (revenue or earnings) and risk (represented by a multiple). Your results determine the financial component, and the multiple is determined by the private capital market (eventual, interested buyers). Many owners don’t realize that the multiple assigned to businesses is really a range of multiples and that they can influence where in that range their business is viewed – by improving parts of their business in addition to sales/financial performance. The low end of the range is for the riskiest businesses (investments) and the high end of the range is for the least risky, or best-in-class, businesses. This means that two businesses in the same industry, with similar financial performance could have significantly different values based on an assessment of their risk, which is based on the areas beyond financial performance. Best-in-class businesses have better employees, better customers, higher profits, and ultimately sell for higher multiples – when the time comes.
You aren’t ready to sell your business, so why is knowing your value important now?
If you learn that you are already best-in-class, you can focus on protecting your multiple and take on projects to grow your financial performance, and/or it could be the right time to think about how to take some money off the table. If you aren’t one of the few best-in-class businesses at the top of the range, there is a gap between the value of your business and best-in-class businesses, and likely a gap in the performance and earnings your company is producing too. While the range of multiples is determined by the market, you can influence where in the range strategic buyers view your business by improving in key areas beyond the financial performance. This isn’t an overnight or magic fix. It is a process that takes time, effort, and discipline. Recall from the previous post that 50% of business ownership transitions are unplanned or due to unforeseen circumstances (good or bad). Improving the non-financial factors in your business is not something you can do once you are faced with a transition event.
Understanding six value-driving areas and how they impact your business is important to identifying where you go from here and how you move from your current value assessment to best-in-class. This is smart business strategy and long-term-planning strategy.
Understanding Key Value Drivers: The key value drivers are the areas of your business that a strategic buyer looks at to determine how risky the investment is and therefore where in the range of multiples to assign your business. The Quist tool identifies six key areas of the business, outside of financial performance, that impacts where in the range of value a business falls and assesses the current state of the business based on the owners’ answers to the interviews. The deliverable included with the business value assessment scores the business in each of these six areas:
· Strategic Value: Industry dynamics, brand awareness, competition, and barriers to entry
· Organizational Value: Culture, processes, systems, and communication
· Employee Value: Strength of employees, the management team, and owner reliance
· Customer Value: Concentration, loyalty, and partnership
· Financial Value: Trajectory along with the quality of data, systems, and reporting
· Environmental, Social, and Governance: Responsibility and awareness
Why is understanding the correlation between the value drivers and your business important?
Think of these hypothetical, general scenarios
A prospective customer is evaluating a competitor and your business. The cost is the same. One company is weak in these areas and the other is strong. Which business are they likely to do business with?
A prospective star employee is evaluating an opportunity at a competitor and your business. The salary is the same. One company is weak in these areas and the other is strong. Which business are they likely to want to work for?
Either on your terms or not, the time has come to transition your business (or your estate is left to do it). Strategic buyers are evaluating your business against alternative investments. You’ve made the investments of effort, time, and resources in the six areas that drive value to be a best-in-class business and to be prepared. Did you leave money on the table and maximize your financial legacy?
Moving from identifying what you have and the opportunity to be best-in-class starts with protecting what you’ve built. The first steps forward are being clear about who you are, focused on what you want, and aligning your team around the objectives with organization and accountability.
Contact us to learn more about completing a Business Assessment.