Often management is in day-to-day operations mode, dealing with crisis after crisis. No one steps back, looks at the big picture and says, “This is my biggest asset and investment, so I need to increase the value.” However, especially if you’re planning to sell or pass your company to the next generation, you need to evaluate the drivers for creating value in your organization.
“The real value drivers that most people think about are growth and profitability. And those truly are important factors when you talk about a driver for value, but really the one area that companies will often overlook is the whole notion of risk — if you’re able to reduce or eliminate risk, you’re increasing value,” says Lewis Baum, director at SS&G Parkland Consulting.
Smart Business spoke with Baum about risk assessment and a strategic plan that will generate business value.
What are some value drivers?
Although value is driven by growth and profitability, a third attribute, which is often overlooked, is risk. The riskier something is, from the marketplace perspective, there’s less value attributed to it. All companies face risk, so it’s good to go through a valuation strategy and identify the various drivers affecting the business. Some factors are:
• Macroeconomic, such as interest rates, inflation, construction trends, etc.
• Microeconomic, such as supply and demand, how individuals make decisions and their impact, and what’s happening with competitors.
• The barriers to entry in your industry that impact the competition level.
• Substitutions, as in what other products or services could threaten your product or service.
• Suppliers and customers who have bargaining power and could affect price and quality.
• Technological, social and demographic changes.
It is also important to understand what the value drivers are for the industry. Certain industries measure value in different ways — a certain multiple or perhaps the number of subscribers might drive it. Intellectual property and trade secrets are becoming a larger component of value. Efforts should be made to document and safeguard such assets.
Other ways to reduce risk, and thus increase value, are ensuring your financials are in good shape and that you have well-documented systems in place.
How do you set up your strategic plan?
Once you’ve identified trends, often with the help of an outside service, you can set a course as part of an overall strategic plan. As part of the plan, management will essentially have a list of things to watch for and goals to meet, which can be broken down into smaller steps. Then, you’d need to set up a mechanism to monitor your progress. It’s something that should be revisited often and should be considered a ‘living and breathing’ plan. You need to be able to incorporate unforeseen changes in order for you to achieve your goal(s).
The ideal time for this kind of planning is when you have enough time to implement changes and create a track record. You want to make your company as effective, efficient and valuable as you can before leaving. Otherwise, your buyer will likely take the same steps to get that added value. Even if you’re not planning to sell, risk assessment and strategic planning may help assess which product lines are more valuable, where growth is really coming from and how to help your business in the future.
Do business owners need outside help?
Yes. Outside consultants can take an active role, or management can utilize the consultant as a coach to help direct the assessment. It’s difficult for business owners to see some of the economic factors and value drivers with fresh eyes. However, owners and management have valuable information as far as identifying their competitors, marketplace trends, etc.
How important are regular employees?
Ultimately, the entire organization needs to accept a value-driven strategic plan and understand their role(s). Employees have valuable insight and are often knowledgeable about inefficiencies and waste. Their involvement allows for ‘buy-in’ and can reduce turnover and frustration. Employees should have a voice in the process.
Lewis Baum, CPA/ABV/CFF, CVA, CFE, is director at SS&G Parkland Consulting. Reach him at (440) 394-6150 or [email protected].
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