HOW DID A SMALLER COMPETITOR SELL FOR 2X AS MUCH?

February 26, 2015

 

You’re in the same industry, facing the same macroeconomic forces, experiencing the same competitive pressures and you’re a little larger than your competitor.  How did they just sell their business for twice as much and execute on their own terms?    

 

Elements of the business’s condition, aside from its revenues and profits, have a large impact on its potential value.  It all boils down to RISK!  Your business’s ultimate valuation is largely determined by the amount of real and perceived risk the prospective buyer uncovers within your business. 

 

It’s easy to make a snap judgment on a company’s value with knowledge of approximate revenue, sales/cost trends, brand presence and owner personality.  These value elements are often visible and easy to discern.  Much like an iceberg in open waters, the amount visible represents 15% of what makes up the iceberg with 85% residing below the surface.  The iceberg analogy also applies when analyzing the valuation of your business.  Sustainable value is derived by evaluating the various, often unseen, components that reduce the risk to a prospective buyer. 

 

Below is a short list of examples of value reducers and value drivers:

 

Value reducers

  • Low barrier to competition

  • Concentrated customer base in limited channels

  • Low customer switching costs

  • No protected intellectual property or reputation management

  • Undocumented operational processes

  • Poorly constructed financials

  • Incomplete agreements with suppliers, vendors or strategic partners

  • Owner is the “most valuable player”

  • Limited bench strength with no succession planning

  • Unclear roles and accountabilities

 

Value enhancers

  • High barrier to competition

  • Diversified customer and channel mix

  • High customer switching costs:  binding contracts, technology, value added features, experience delivery, etc.

  • Clear value propositions

  • Well documented and robust operational processes

  • Thorough, written, strategic plan

  • Reviewed or audited financials

  • Owner not essential to ongoing business success

  • Succession plans in place

  • Clear roles, accountabilities and performance metrics

 

Implementation of value enhancers requires an intentional and consistent team effort.  Too often, business owners and their executive teams get entrenched in the day-to-day operations and neglect the very things that ultimately drive value and reduce risk. 

GROWTH does not always equate to VALUE. We often witness that early success or rapid growth does not always equate to ongoing incremental and sustainable performance.  Rapid growth can actually detract from value if the organization’s corporate governance, internal systems, strategic planning, execution and organizational culture no longer adequately serve the more complex business.

It’s tough to work “ON” your business when you’re stuck “IN” it!  A handful of key strategies you can employ to begin to unlock the hidden value in your business:

 

  • Engage an objective third party to facilitate a strategic planning process with your key team members.  A trained professional with former operational expertise can be instrumental in evaluating the various aspects of your business model and help in identifying and prioritizing the opportunities to enhance value.   The right candidate will have expertise in evaluating market / customer segments, value propositions, channels, customer relationships, culture, organizational structure, financial systems, partnerships and corporate governance.

  • Meet with an investment banker to get a flavor for the current market, deal flow, and sale multiples.

  • Actively benchmark by engaging in industry peer groups where key metrics can be shared without compromising your specific business identity. 

  • Budget dedicated time in your weekly schedule where you focus “ON” the business.  Create protected thought time to ask critical questions, play “undercover boss”, research, benchmark, and evaluate trends.  It requires discipline each and every week to implement this time and will open your eyes to opportunity.

 

For most entrepreneurs, 80% or more of their asset base is locked inside of their business. Don’t become hostage to your business and lock up the value and legacy you've cultivated. The time for creating value enhancers and taking deliberate action is NOW!  www.flvcp.com

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