Wednesday, June 13, 2012

The Value Enhancement Process – Part 1 of 2

Enhancing the value of a business is a process that takes time, which is why it is vital for business owners to begin this exercise at least 3 to 5 years prior to an exit or sale of the business.

The value enhancement process consists of the following five steps:


Brief Description

Benchmark business valuation

  • Independent baseline valuation
  • From perspective of potential purchaser
  • Presentation to management
Detailed value driver analysis

  • Complete Sellability Score questionnaire
  • Detailed management interview
  • Value factor assessment
Prioritize the key value drivers

  • Each value factor rated on Relevance and Impact
  • Identify top 5 to 10 key value drivers
  • Presentation to management
Develop action plan

  • Strategic planning session with management
  • Identify goals and brainstorm obstacles
  • Brainstorm and prioritize strategies to overcome obstacles
Implement, monitor and follow-up

  • Assign tasks and responsibilities to key individuals
  • Develop short-term targets/objectives
  • Quarterly meetings to monitor progress
  • Updated business valuation to measure progress

The value enhancement process begins with a benchmark business valuation.  A detailed value driver analysis is then conducted that starts with the business owner taking the Sellability Score [1] questionnaire followed by a detailed management interview.  We will discuss the Sellability Score in more detail at a later date.

Understanding how value is created and what the key value drivers are for the business is vital to enhancing the value of the business.  Chartered business valuators are trained in this regard.

Value for most operating businesses is a function of two primary components:
  1. The quantum of the expected future cash flows – referring to the revenues minus the costs and required investments associated with generating those revenues; and

  2. The quality of the expected future cash flows - referring to the sustainability and variability of the cash flows, measuring how sensitive the cash flows are to the various risk factors facing the business.
Prospective purchasers will place more value on a predictable stream of higher cash flows that are expected to increase than a volatile stream of lower cash flows that could potentially decline in the future.

There are many value drivers that affect either the quantum or quality (or both) of a business’ expected future cash flows and, therefore, its value.  The key to enhancing the value of a business in the most effective and economical way is to assess each value driver on the basis of its "relevance" and "impact" and then to focus attention on the high priority key value drivers.

Next week, in Part 2 of 2, we will discuss how to identify and prioritize the key value drivers and what the top 3 value driver categories are for most businesses.


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