Wednesday, June 20, 2012

The Value Enhancement Process - Step 2 of 2

In order to increase the value of a business the key value drivers must be identified.  Determining the key value drivers requires an assessment of each value driver’s relevance and impact in affecting value.

Relevance - refers to how important the value driver is to increasing the quantum and/or quality of the cash flows in light of the owner’s goals and time frame.  Each value driver can be classified as: (a) Not Relevant; (b) Somewhat Relevant; or (c) Very Relevant.

For example, having a sound business and growth plan will help a business sell more quickly and attract better buyers.  Therefore, possessing such plans would rank as very relevant.

Contrast this with implementing a more efficient manufacturing process to reduce costs.  This would be expensive, disruptive to existing operations and take significant time to implement.  If the owner’s goals include spending less time at the company and exiting the business at the end of one year, then this initiative would score lower on the relevance scale.

Impact - refers to the potential increase in value that addressing a value driver may have given the investment required and the company’s existing strengths and weaknesses.  Each value driver can be classified as having a: (a) Low Impact; (b) Medium Impact; or (c) High Impact. 
For example, the business may have customer relationships but no contracts.  In addition the relationships may be entirely with the business owner.  The lack of contracts and significant reliance on the owner’s relationships with the customers for repeat business are two value drivers that will score high on the impact scale.

Contrast this with a business that has name recognition in the marketplace, customer contracts in place and does not rely solely on the owner for continued business.  For this business, focusing effort and attention on these areas would not have a significant impact on value and, therefore, would score low on the impact scale.

After identifying each value driver’s relevance and impact, the key value drivers can be determined.  To assist in this process, each value driver should be classified as "neutral", "positive" or an "opportunity for growth".  A positive value driver implies that it is either not relevant or it will have a low impact on value.  An opportunity for growth represents the value drivers classified as very relevant with a high impact.  These are the key value drivers that, with effort and attention and through a solid action plan, will serve to enhance the value of the business.

Although there are many different value drivers, certain key value drivers are common to many businesses.  The top three categories of value drivers that tend to provide the best opportunity for value enhancement are as follows:

Value Driver Category

Specific Characteristic That Will Increase Value

Customer Base
  • Not dependent on any one customer or customer group
  • Strong relationships leading to repeat business
  • Existence of customer contracts

  • Scalable operations going forward
  • Viable growth plan
  • Growing industry

Management Team

  • Transferable management team 
  • Significant experience and knowledge base
  • Formalized roles and responsibilities

Next week we return to the 6 step exit planning process with Step 4 – Exit Options Analysis.

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