Value Drivers

Let’s talk about transferable value: the value buyers look for and pay for when making acquisitions.  Value drivers increase transferable value if they contribute to cash flow both during and after the original owner’s tenure.

Determining how to increase transferable value is the owner’s job.  But once owners and their advisors determine which of the value drivers (listed below) must be strengthened, everyone in the company should be involved.  Owners cannot do it alone.  If they could, by definition they wouldn’t be creating transferable value because once they departed, the value drivers would disappear.

As you read through the list, remember that it contains only the “generic” value drivers. Depending on what your company does, it may have other factors that create and increase transferable value.  Also, there’s no particular order to the list except for management team: it is management that creates, manages and grows these essential business characteristics. A stable, motivated management team that stays after owner leaves.

1. Operating systems that improve sustainability of cash flows.
2. A solid, diversified customer base.
3. Recurring revenue.
4. Sustainable revenue, resistant to “commoditization.”
5. A Competitive Advantage.
6. A documented and proven growth strategy.
7. A demonstrated and successful acquisition strategy.
8. Financial foresight and controls.
9. Good and improving cash flow.
10. Scalability.

We will discuss each of these in future entries, but for now, a quick word about each.

1. A stable, motivated management team that stays after owner leaves.  If you plan to take any exit path other than liquidation, capable management is indispensable.  Having the “best in class” management is the surest way to become a “best in class” company.
2. Operating systems that improve sustainability of cash flows.  The establishment and documentation of standard procedures and systems demonstrate to a buyer that the business can maintain profitability after the sale.
3. A solid, diversified customer base. Buyers typically look for a customer base in which no single client accounts for more than 10 percent of total sales.  A diversified customer base helps insulate a company from the loss of any single customer.
4. Recurring revenue.  As a buyer, would you not want to acquire a business that prints money with the push of a button?  Is there a way for your company to create a recurring revenue stream?
5. Sustainable revenue. Buyers look for revenue streams that continue despite fluctuations in the economy.  They also prefer those that are resistant to “commoditization.”
6. A Competitive Advantage.  To paraphrase Michael Porter of Harvard University’s Business School, competitive advantage is the product or service that a company offers–either better or more cheaply–over time than does its competitors. Your company’s competitive advantage is the reason your customers buy from you instead of from your competitors.
7. A documented and proved growth strategy.  Even if you expect to retire tomorrow, it makes sense to have a written plan describing future growth and how that growth will be achieved based on industry dynamics, increased demand for the company’s products, new product lines, market plans, growth through acquisition, and expansion through augmenting territory, product lines, manufacturing capacity, etc.  It is this detailed growth plan, properly communicated, that helps to attract buyers.  Buyers will give credence to your current growth plan if previous plans have attained their goals.
8. A demonstrated and successful acquisition strategy.  Enough said.
9. Financial foresight and controls.  Effective financial controls protect company assets and support the claim that a company is consistently profitable.
10. Good and improving cash flow.  Ultimately, all value drivers contribute to stable and predictable cash flow.  You can begin increasing cash flow today by simply focusing on ways to operate your business more efficiently by increasing productivity and decreasing costs.  What those ways are and how to accomplish them is worthy of consideration–and a future blog or two.
11. Scalability.  Can your company improve its profit margin if it increased its revenue?  Think about designing a computer app–like Angry Birds.  Yes, it’s a bit more difficult if you own a hardware store.

Creating the plan to increase transferable value in your company is your job.  No one else cares nearly as much and no one else will reap as great a reward.  Executing the strategy to increase value, however, is everyone’s job.  If you don’t already have top managers and skilled advisors ready and willing to provide ideas and implement value drivers, I suggest that you recruit them. Today.

Copyright BEI Inc.