This article is part of a comprehensive series exploring value creation in anticipation of a downstream transaction and as a foundational business strategy. You can download the complete guide here.
The value creation process consists of two distinct steps: (1) assessing the current state of the business and (2) remediating identified gaps while implementing value creation activities.
Assessment
The value creation process requires critical thinking and analysis across the organization. An organization begins the process through the lens of a buyer and identifies areas most likely to result in discounting and a reduction of the purchase price in a sale transaction. It also identifies upside opportunities for value enhancement, such as repositioning a product or service offering as a recurring versus project-based revenue stream.
The assessment process is not just a series of “canned” questions, but workshops and one-on-one interviews coupled with data review and analysis across all key functions of the company. It includes a review of operations as well as support functions, such as marketing/sales, human resources/talent management and accounting/finance.
Areas analyzed may include the following:
- Business Development/sales structure and go-to-market strategy.
- Customer concentrations
- Customer contract composition – status of key contracts and special preferences
- Decision-making processes (governance structure)
- Employee agreements, compensation, benefits, and incentives
- Financial reporting – GAAP v. non-GAAP basis statements
- Intellectual property and perfection of ownership interests
- IT/ERP environment and other key systems (CRM, project management, etc.)
- Key business processes (policies and procedures)
- Management team composition and structure
- Market size and positioning
- Operating cost structure – fixed and variable costs
- Organizational structure
- Revenue streams – nature and composition, recurring versus non-recurring, gross margin by product/service line, etc.
- Strategic planning/budgeting process
- Working capital maximization
The analysis of each area helps organizations identify a series of value gaps and value creation opportunities.
Gap Remediation and Implementation of Value Creation Activities
Next, organizations rank each of the value gaps or value creation opportunities identified as part of the assessment process based on impact, timing, and cost (level of effort). They then formulate a targeted plan to address each gap and value creation activity and decide on key performance indicators to track and monitor progress.
In most value creation exercises, businesses give the highest priority to low effort, high impact items. They rank mid-term and longer-term items based on relative return and establish a plan to move the effort forward. Although organizations can make significant progress in as few as 6 months, the ideal time frame to create measurable improvement often takes 12 – 18 months.
Working with one federal government contractor, we moved from a single to double-digit multiple of EBITDA prior to the sale process. Our work for this contractor included the following value enhancements:
- Establishing an achievable strategy and execution framework with goals/objectives that could be driven downward, throughout the organization.
- Eliminating an unprofitable product line (and treating related costs as an adjustment to EBITDA)
- Reconfiguring the management team to reposition individuals based on their relative strengths.
- Filling a back-office resource need that would better position the company as a platform company.
- Building out a formal business development process and implementing a CRM/pipeline.
- Reviewing compensation and incentives and establishing incentives that align with the strategic direction of the company.
In the value creation stage, it is also critical to establish a formal feedback loop for the key performance indicators that were identified to monitor progress. This provides a means for measuring success and allows for mid-course corrections, as necessary.
Related Articles
Cracking the Value Creation Code: Laying the Foundation
Cracking the Value Creation Code: Key Considerations for the Value Creation Process
About SD Capital
SD Capital is a premier, full-service, value advisory and investment banking practice that assists middle-market companies in creating and maximizing business value. We provide strategic evaluation and execution of various downstream sales and monetization pathways. With decades of combined executive experience running, owning and advising private companies our team is uniquely positioned to guide owners through the complex process of growing and selling their companies.
Learn more at www.sdcapital.com or contact the team directly at [email protected].
Schneider Downs Capital LLC is a subsidiary of Schneider Downs & Co., Inc.
