Introduction to Value Drivers

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I remember the excitement of starting the search for my first home. I was proud that I had diligently planned and saved and could now provide a home for my family, my indoctrination into adulthood.  I searched the real estate sites and apps relentlessly. I had my list, contacted a real estate broker and the journey began. After the first weekend, I realized that the homes that fell within my budget came with surprise rooms that were not included in the 34-image photo tour online. Rooms with dated décor like sunken living rooms from the 70s or some sad floral wallpaper with odd cutouts and from electrical outlets that were no longer in use. Bathrooms that needed updating, roofs that needed patching, and landscaping that needed to be brought back to life.  It was humbling, to say the least. There was not a home my money would buy in Westport, CT that did not require extensive work. Just the thought of it was daunting. The problem was that my wife was already packing and organizing for the impending move. Now what?

One day I got a call from my broker. She wanted to show me three properties and the first was brand new construction that was $200k more than my initial budget. I was adamant that I did not want to view it because, from a quantitative standpoint, I drew that line in the sand — but she had years of experience.  “Just meet me there, you don’t have to come in.  I have a showing and then we can go together to see the other homes.” I pulled up to the home and from the outside it was perfect. I called the broker to tell her that I was outside waiting, to which she wisely replied, “Hey, so sorry I am going to be another 20 minutes, just come in and grab a water, wait for me in here.”  Begrudgingly, I agreed and walked inside. It was as amazing as the outside: bright, open, gorgeous kitchen, plenty of room in the yard, all the rooms were pristine.  I toured the house for about 30 minutes; the broker shared all of its attributes from state-of-the-art electrical features and alarm system to multiple water heaters and brand new everything.  She then whisked me away at the perfectly timed and crafted moment and said “ok let’s go see the two other homes I promised.  Walking out of the dream and into two nice-ish homes, that was her plan. She knew I would immediately see the value in the new construction home and that the amount of work, time, and money that would have to go into the other homes would surpass the additional cost.  It was clear that the value drivers of the new home were enough to get me to make an offer above my original budget, because I saw the immense value of what I was buying.

Welcome to your introduction to the concept of value drivers, critical to your exit strategy when positioning your business for sale. In the eyes of buyers, these elements significantly influence the worth of a business. I am going to share some fundamental steps to enhance your own business’ value drivers.

First, what is a “Value Driver”?

A value driver is the key aspect of your business that can increase the amount you can sell for and/or enhance the attractiveness of your business to buyers. Like my home buying story, updating or renovating the kitchen and bathrooms, nicer landscaping, removing dated design elements all can provide more curb appeal and result in a higher sale price for your home.  You should be thinking along these lines when looking to exit your business. Think about the factors that contribute not just to your company’s current profitability, but also to its potential for future growth and stability.

Step One: Identifying Key Value Drivers

There are some common value drivers which include.

  • a strong, independent management team
  • a solid, diversified customer base
  • steady cash flow
  • well-established brand
  • unique technology or intellectual property
  • efficient operations

Step Two: Evaluating the Business’s Current Standing

This is the process of evaluating how well your business currently performs in each of the key value driver areas. This involves a SWOT analysis, a thorough, honest assessment of your business’s strengths, weaknesses, opportunities, and threats. This often requires input from external professional advisors to provide an objective viewpoint.

Step Three: Strategies for Enhancing Value Drivers:

This involves several areas you may need to improve, such as:

  • investing in developing management roles and responsibilities
  • improving customer relationship management
  • diversifying your customer base
  • optimizing your operational processes
  • investing in marketing and/or brand development

Step Four: Measuring the Impact: 

The importance of setting measurable goals for each valued driver is highlighted. My suggestions are that by quantifying specific targets, you can measure your improvement, you can more effectively track progress and make adjustments as needed. For instance, if you have an inventory lag of 30 days and your industry average is 20 or 25 days of inventory lag, a target measure would be to trim that to industry average or better.  That alone could result in an increase in your valuation.

Step Five: Communicating Value to Potential Buyers:

It’s not just the enhancement of value drivers that’s important, but also the ability to effectively communicate them to potential buyers. Let’s return to our home sale analogy: if you renovated the kitchen and bathrooms and added a new roof, you should be highlighting these updates, including the cost, care, and love you put into your home. It is also important to note the time and money they would be saving by not having a leaky roof or having to live through the renovation process, dealing with construction and contractors because this has already been done for them.   By preparing compelling, data-backed narratives around each value driver, you can significantly impact the perceived value of the business during the sale process.

In selling your business just like selling your home it would be wise to place great emphasis on the importance of the areas that drive the value of your business. By going through the steps detailed above which are part of the exit planning process, you will have a roadmap to help of identify, evaluate, and enhance these drivers, thus increasing the potential sale price and attractiveness of your business to potential successors. Taking the appropriate steps to shape your business into a more valuable, sale-ready entity, puts you in control and paves the way for your most successful and profitable exit.

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