By Steve Williams
Much has been written about improving business profitability, so too has there been much on business valuation. There is far less attention to the symbiotic relationship profit initiatives and valuation could have. Many companies make changes to increase profit without thinking about the impact it will have on the valuation of a company. Sure, on a straight-line basis, if you increase profit, you should be increasing your company’s valuation, but not always.
Profit initiatives not measured against impact on valuation have the potential to decrease the value of the business in the market’s eyes. For example, with supplier concentration, many companies rightly are focused on reducing costs such as unnecessary inventory. From a profitability standpoint, this initiative can make sense, but the execution can have a downward impact on valuation. If inventory is reduced by streamlining supplier count to one supplier rather than maintaining a healthy stream of suppliers for a company’s key offerings in the market, this will result in supplier concentration and may be looked on negatively by potential buyers at the time of transaction, impacting due diligence opinion, offer terms, and enterprise value.
Taking care of a double bottom line—profit and enterprise value at the same time—can happen. It comes down to companies being mindful and forecasting how initiatives will impact both profit and valuation. So, where does your company start? Here are a few great ways to positively impact profit and valuation with the same initiative.
6 Ways to Increase the Profit and Value of Your Business at the Same Time:
1. Differentiation: This starts with a product owner—at least one individual in your company who has collected data on client needs, competitive matrix, and core competencies. Relevant differentiating benefits from competitors will create a moat around your offering, allowing you to have stickier customer relationships and to increase margins and sales. But in the business-for-sale marketplace, companies with differentiated products or services can command a premium, but you’ll need to demonstrate that your company is uniquely positioned to dominate a slice of the market. To do this, be sure to develop and promote any patents, intellectual property or other unique features of your products or services that give you an advantage over your competitors.
2. Strategic Planning: A documented strategic plan that has been socialized and bought into by key management are valuable profit generators. One-pagers are great but they need to start with market, industry and competitive analysis to ensure your company knows its position in the marketplace. Measureable, attainable objectives and good strategy will help guide your company to short-term gains, demonstrating to potential buyers your company’s institutional knowledge and way forward, giving your company credibility as a viable acquisition target. Make sure it meets high strat plan standards—just because you know your business, does not mean you can present that in a way that makes buyers take notice. If this is a concern, bring in a third party that can have you punching above your weight, demonstrating your company’s knowledge and direction within high strat plan standards can really pay dividends.
3. Customer Concentration: Ask yourself, what would happen to our company if we lost our top three clients? Your answer is how a potential buyer will see your company’s value. For example, if your top customer represents 25% of your top line, then many buyers may take into consideration the impact of a 25% haircut soon after close of transaction, thus impacting the enterprise value of your company in the marketplace. Eliminating customer concentration also adds profit to your organization. If you can serve a small number of clients well, then by extension, you should be able to meet the needs of their competitors well too. Adding clients increases sales and for an already profitable business, this adds more to the bottom line.
4. Diversification: Market and industry diversification is critical to sustained profitability. The more profitable markets and industries your company can successfully serve, the more bulletproof your sales curve. This leads to consistency, which greatly enhances a company’s momentum and reduces hair-on-fire distractions. To a buyer, a consistent, growing sales curve is a foundational element in valuation. Buyers looking at forecasts that are natural and evidence-based extensions of the current curve will have more confidence in your company’s future, and this will increase a company’s value and interested buyer pool.
5. Strong Management: This is critical to a good bottom line. Momentum, efficiency, resourcefulness, vision, and ability to execute on plan are all hallmarks of strong management and all lead to greater profitability. Strong management is also good for valuation. Buyers see things like consistency, the ability to transition after a transaction and of course a succession plan in case owner/executives are not committed to the long term after the transaction. So keep key employees on board and have your succession plan clearly articulated in your Strategic Plan.
6. IT Systems: A well implemented, fit-for-purpose system that creates efficiency around and allows for replicable key business functions (not just accounting) will positively impact profit and valuation. Profit will increase as your company will be able to do what it needs to do with less effort, resources and more accuracy and speed. This initiative will also increase valuation, as a well-implemented system will entrench core processes post-transaction and decentralize the knowledge base, allowing a buyer to feel more comfortable that information and business functions extend beyond the ownership group. Savvy buyers understand that in some businesses, the most valuable asset is the seller. As the seller, your job is to convince buyers that they can continue to successfully operate the business after you leave—a good enterprise system is a great tool to assist in this.
All the above can be considered as individual initiatives, or initiatives that can be done in series or even in parallel, depending on the availability of your resources. If initiatives that impact both profit and valuation resonate with you, it is always a good to start by engaging an independent advisor who can do an enterprise level assessment in order that profit/valuation initiatives can be prioritized by you. Remember the above six comprise a short list of many possible double bottom-line initiatives. A comprehensive view of your company may have you prioritize other more meaningful objectives than the above. Regardless of the initiative(s) you focus on, ensure they have a positive impact for both profit and valuation, and you will start reaping the short- to long-term rewards of a double bottom line.
Steve Williams is a Principal at the Incentica Advisory Group in Calgary. Steve has done over 100 strategic plans for some of the biggest and best companies in Canada.