First, let us start by saying “VALUE IS IN THE EYE OF THE BEHOLDER”. I wish that was my phrase but somebody said it way before my time. However, this phrase could not be more true than in the transaction world (of Mergers & Acquisitions, real estate etc.).
In my practicing in the transaction business for almost 50 years, I cannot tell you how many times I’ve asked the question:
- What do you think your business is worth? I’ve been answered: Well, my friend at the country club along with 2 or 3 others that sold their business got an 8 times or a 10 times multiple for their business. Therefore, I think I should get at least that. So, then the follow up questions are:
- Do you have any idea the size of their business?
- Do you have any idea what type buyer it was?
I will not bore you with all the other questions. What I will tell you is there are many components to Creating Value in a business and every business is different. There may be general guidelines in every Industry but every company is different within the industry. Therefore, every situation needs to be evaluated separately but compared to other transactions as well.
One of the factors that plays an instrumental part in effecting value are the Intangible assets of a business. In addition to the intangible assets (the ones you can touch and feel) are the tangible assets that are there but are not quite as obvious because you need to delve into the business to find them. They are assets of the business that bring substantial profitability and are seldom noticed. Items such as: patents and copyrights, Brand recognition, customer base and consistency, culture and leadership, human capital. Get the gist? Below is a chart from Aon that shows the value of Intangibles from 1975 to 2018 and a link to the original article: https://www.visualcapitalist.com/intangible-assets-driver-company-value/
So, let us get to talking about what it takes to build that value. The basis for Building Value is to have all or as many of the components in place as possible. That is what buyers want to buy and that is what will deliver the greatest profitability and growth potential to a business. Buyers are looking to buy businesses that they can step into and build onto without having to rebuild infrastructure. So, what is the foundation of value creation? Here are the building blocks we see:
VISION, MISSION, VALUES and STRATEGY
– Companies need to have a clearly defined Plan and know where they are going and how they expect to get there.
– A strong financial position (with defined objectives, measures, goals and initiatives)
PROCESSES and PROCEDURES-
– Strong systems in place (with defined objectives, measures, goals and initiatives)
PEOPLE and TRAINING PROGRAMS
– To achieve the VISION and mission (with defined objectives, measures, goals and initiatives)
– Have a strong consistent base to achieve the vision and mission (with defined objectives, measures, goals and initiatives)
BRAND, CULTURE, LEADERS, etc.
– Scalable for growth
Companies need to invest in the business building all the components above to increase profitability, longevity and a living entity to exist with or without the key players being there so the business is a living being. Look at companies like Apple and Microsoft. Both companies have prospered after their founders are gone. They had a culture, plans and an infrastructure to carry on operations, technology advancements along with profitability and very strong brand recognition. With all of these components in place I think you now understand why they have such a high value in the marketplace.
Got the message yet? It takes a strong organization with excellent profitability, systems, a strong growing and consistent customer base as well as all the intangibles to produce MAXIMUM Value Creation. This does not happen overnight. It takes lots of PLANNING AND HARD WORK. This is the reason why so many of our communications and articles incorporate planning and the planning process into the articles. Without planning you will never be able to achieve the maximum value creation for your business. However, just as important as planning is the execution of those plans. The number 1 reason for the failure of strategies is the failure to execute properly. Therefore, as part of the planning process, there should be an execution plan as well.
So, what is value? Value as it is defined in Websters Dictionary is: “Worth”; estimate of worth”; “price equal to the worth”. However, there are all types of value. As we said at the beginning of this paper – “Value is in the eye of the beholder.” There is market value, there is asset value (generally based on appraisals), Fair Market Value etc. etc. When you boil it down, there are all types of values.
Therefore, this is the reason why there are always so many differences of opinion as to why the value of an asset can have so many different values. We are going to talk about business value and building the value of the business. The business can have very different values depending on the purpose of the valuation (estate value, selling to a strategic buyer, selling to a financial buyer, selling to an ESOP, valuing for a shareholder buyout) as well as the intangible values to a buyer of the business.
Why? Some of these are legislated and others have reasons for higher value (the big one is strategic value) and some have reasons for lower values (the big one is minority interest).
Building value in a business is a process that takes time, hard work and planning. And flawless execution. Let me give you some definitions of Value Creation I found that I think will help crystallize the importance of working on your business and not just in the business.
- Value creation is the primary aim of any business entity. Creating value for customers helps sell products and services, while creating value for shareholders, in the form of increases in stock price, insures the future availability of investment capital to fund operations.”
- “Value creation is the bedrock of business. It’s what sets you apart from the competition, secures long-term customers and brings distinct meaning to your brand and your solution. Without it your unique offering will be rendered just another commodity in the eyes of your target market.”
- “A winning Value Creation Strategy is essential to define where and how a company can excel in systematic change, sustaining the core, creating the new and delivering fast…It is rather a question of how to define sustainability in the context of the core business and a question of undertaking a distinct commitment.”
Hopefully, these definitions helped put the value creation into perspective – it is not just profitability but rather how you achieved that profitability and all the intangibles and components of the business that go along with the profits and infrastructure you built and you leave behind in the organization to operate consistently with or without you.
Below is what we think are components to be successful in achieving Maximum Value Creation:
In conclusion, I hope we were able to convey the importance of building value and help you understand what the building blocks are of Creating Value in your business and how to maximize the value of what is generally the largest asset of wealth you have. In some future articles we plan on addressing Succession Planning and Exit Planning so you can exit your business with maximum value and enjoy the fruits of your labor in retirement or move on to another career. Should you need any advice or would like to discuss anything in this paper, you can reach Barry Worth at: (314)795-6014 and Steve Finkelstein at (314)409-6869. We would be delighted to speak with you.
Below is a short self-assessment quiz for you to use to understand how you evaluate your current position and what you need to work on. We do offer a two- hour workshop on value creation should you be interested in exploring this beyond the self-assessment. You can contact Steve or Barry at the numbers above.
Below is a simple self- assessment to provide insights into your Value Creation Readiness.
For more information about Experience On Demand, you can go tour website: www.experience-on-demand.com or you may call either Barry Worth at: (314) 795-5014 or Steve Finkelstein at: (314) 409-6869.