Value Drivers That Maximize Company Value

Back to Tool Box

Buying a company, especially a privately owned middle market company, is a complex transaction fraught with risk.  Consequently, owners selling a company must make every effort to mitigate those risks.  One way to accomplish that is to identify the company’s “value drivers” and burnish them brightly.

Value drivers are those attributes that distinguish successful companies and set them apart.  They reduce risks perceived in owning a business.  They increase the prospect and likelihood of future growth.  They create and drive sustainable value.  They make a company more valuable than another.  They enhance value and provide justification for a premium price.

We are often asked what are the “key” value drivers of a business.  As one would expect, value drivers vary with every business.  The following, including some of the questions prospective buyers are likely to ask, are common to most businesses.  Not all are present in every business.  The more that are present the more valuable the business.

Depth and Breadth of Management Team

Is the owner the center of the universe around which everything revolves or is there a team of key employees present so that the owner could take a three month vacation and return to find a fully functioning business?  Is there a team in place that has the leadership, skills and knowledge to continue to grow the company if the owner is not around?  Are there employment agreements and appropriate incentives?  Will management stay after a sale?

Well Developed and Documented Business Systems

How well are the records, documents, files, processes, etc. of the business organized?  Are financial statements, tax returns, Board minutes, etc. prepared and filed in a timely and accurate manner? Are IT systems completely documented and capable of supporting future growth?  Are all agreements with customers, suppliers and employees documented and if appropriate drawn up by legal counsel?  Are the operating systems and procedures sufficient to sustain future growth?  Are there any verbal or “handshake” agreements?

Diversified Customer Base Delivering Recurring Revenues

Do two or three customers account for 15% or 20% or 30% or more of revenues?  What would happen if one was lost?  How much of your revenues are repeat business?  Why does a customer buy?  What is the average tenure of a customer?  How many customers have been added in each of the last five years?  How much is new business and how easy is it to generate new business?  Is the market served large and growing?  Is the company a market leader?  What effect do “economic cycles” have on customer buying patterns?

Sustainable Competitive Advantage

Do the products or services offered have brand recognition in the market?  What barriers to entry exist, were they developed by the company and are they defensible? Are there proprietary processes and technology or are the products and services offered essentially commodities competing on price?  Are the costs to switch high?  Who are the principal competitors and are they larger or smaller?  Is the company considered the innovation leader of the industry?

Does the company possess trademarks, patents, copyrights, trade names, trade secrets, proprietary manufacturing processes, industrial designs, customer lists, long-term contracts, unique sales processes, licenses, permits, unique domain name, etc?  Are they well documented and appropriately secured?  How is privacy and confidentiality maintained?  Is there any threatened or pending litigation concerning the intangible assets?

Consistent Financial Performance

Have sales and profits grown consistently over a period of time or is this the proverbial “hockey stick” that is often seen.  Is there a business plan and a budget?  Is there a clear separation of what are business expenses and what are personal expenses?  Are gross margins and pre-tax profits above or below industry averages, are they sustainable?  Are financial statements readily understandable?  Are there significant capital expenditures required to maintain the current level of business and future growth?  Are future expectations for gross margins and pre-tax profits realistic?  Is the growth strategy realistic to achieve the projected financial results?

Product/Service Mix and Differentiation

Does the company offer a wide array of products and/or services to its customers or is like the proverbial “one trick pony” of yore?  Are the products and services offered unique and not easily replicated?  How do they standout from the noise in the marketplace and differentiate themselves from the competition?  Are there technological advances on the horizon that could cause the company to have the fate of the proverbial buggy whip manufacturer?  Are the products and services offered considered “cutting edge” or industry leaders?  Is the company dependant on any one supplier?  Are there any “sweetheart” agreements?

Company Reputation and History

How long has the company been in business?  How long has it been under the same ownership and management?  How is the company viewed by its customers, suppliers and employees?  Is it considered fair and aboveboard in its dealings with its constituents?  Is it considered a good corporate citizen by the community?  Has there been a history of “pushing the envelope” with regulatory agencies?

Employees and Employment Practices

Is there an adequate and well trained labor pool available to support the company’s projected growth?  Is there a well trained and knowledgeable human resources staff?  Is there a policy and procedures handbook that is given to employees?  What types of employee benefit plans are offered?  Is the prevailing wage rate above or below market?  Is there a union?  Is the industry unionized?  Has there been any union organizing activity?  Are all employees appropriately documented?  What is the level of employee turnover?

Sales, Marketing and Distribution

Are there any long term contractual agreements?  How long is the sales cycle?  How easy or difficult is it to identify new customers?  Are products sold to distributors, retailers or directly to the end user?  What are the terms of sale? How often are new products developed and introduced?  Are they truly new products or line extensions?  Is market research used to determine what products should be developed?  How long is the typical development cycle from concept to customer delivery?  Is there a marketing plan?  What period of time does it cover and how often is it updated?

Conclusion

The M&A market today is decidedly different from the mid 2000′s when there was too much money chasing to few deals and companies were bought without much thought to making them work. It is far more difficult today to consummate a transaction as buyers are more cautious and circumspect.  To successfully sell a company today it is essential for owners to plan ahead and polish the value drivers well in advance of an anticipated sale.

The material presented above was the lead article in the August 2011 issue of the ACG Private Capital Review.  The newsletter is published monthly by the Association for Corporate Growth for the benefit of its 14,000 members.  All of the Association’s members are actively involved in one or more aspects of corporate growth that lead to increased stakeholder value.

Back to Tool Box