A Valuation Driven Strategy™ is really a permanent change in the culture of the organization, where business decisions are filtered based on whether or not they contribute to an increase in the value of the company. In stock market terms, its ‘market cap.’ All strategic business decisions are evaluated through the prism of the Valuation Driven Strategy™ and Invest-Ability Index™.
The following outlines a sampling of the process and six major areas of the 40+ valuation drivers that we focus on:
1.0 VALUATION DRIVEN PROCESS MAP
2.0 BUSINESS BASELINE
3.0 FINANCIAL PERFORMANCE & INTEGRITY
4.0 GROWTH POTENTIAL
5.0 CUSTOMER DIVERSITY AND ATTENTIVENESS
6.0 SALES AND MARKETING PERFORMANCE
7.0 MANAGEMENT TEAM EFFECTIVENESS
8.0 OPERATIONS EXCELLENCE
9.0 OPERATIONALIZING THE STRATEGY
10.0 IMPLEMENTATION AND CONTROL
11.0 THE ONE PAGE VALUATION STRATEGY™
12.0 VALUATION STRATEGY ROLL OUT
13.0 SUSTAINABILITY, VALUATION, AND INVEST-ABILITY HEALTH CHECKUPS
Value = Valuation + Invest-Ability Index
Benefits of having a Valuation Driven Strategy.
- Opportunity to offer a retention strategy for key employees based on valuation of business: bonus paid into escrow account, drawn out in three-year rolling withdrawals as retention incentive.
- The most convincing track record you can have for any purpose is the track record of business valuations increasing over time
- Shareholders in privately held companies should require management to have a valuation driven strategy for growth. It’s what they are counting on – the value of their shares increasing.
- The vast majority of business owners will exit the business by closing it down, even apparently healthy multi-million dollar businesses because they are unsalable. The owners discovered too late the importance of having a valuation driven strategy for the business on an on-going basis
- There is no more devastating time to discover the valuation of your business then when you are in the beginning of a negotiation, no matter what the purpose of the negotiation is.
- All public companies know the value of their company at any given time – it is reflected in the stock price, and it is the most important metric they have for making strategic decisions. Shouldn’t the private business owner have a strategy for monitoring and improving their valuation on a regular basis?
- Warren Buffett says that the business valuation question is the most important question every business owner should address.
- As Warren Buffett admonishes, ‘without a valuation and a strategy to improve it, you are flying blind.’ Then what are you working to accomplish?
- If you don’t know the value of the business you are building, any path will get you there
- The most important key to building a viable business is to know it’s valuation at any given point and in having a strategy to build that value
- If you want to build a valuable business over time, you need a strategy to monitor it and optimize it over time.
- The valuation driven strategy for growth is the most important function of a management team, no matter what the size of the company is.
- And the track record of a valuation strategy for growth implemented over time is the most important track record a business can have for virtually every scenario the business will encounter.
- No other strategy and set of metrics can deliver the goal of a higher valuation over time. The danger is that focusing on other metrics such as sales growth can be misleading as valuation could be decreasing at the same time.
- Tying bonuses and retention strategies to performance and the measurable outcomes from implementing and monitoring the evaluation strategy is a smart way for business owners to keep the focus on both the near-term and long-term efforts of the management team.
- Waiting to improve your valuation or implement a valuation strategy until six months or a year before you need it is like waiting until six months or year before you retire to decide to fund your retirement.
- According to a CNBC study, over 10 million businesses will be sold over the next decade, 80% of owners and shareholders are planning on funding their retirement almost entirely by exiting and selling their business. The majority will fail.
- Just like any other strategic plan, every manager in the company should be aware of the valuation driven strategy for growth, have a role in it and be aware of the metrics used to evaluate the drivers and the valuation. Their compensation should be tied to the accomplishment of those goals and the improvement of those metrics, including the valuation.
- A valuation driven strategy for growth is an integral part of the culture. It is an ongoing part of the management responsibility and evaluation. It is not separate from their job, it is their job, and affects how they go about their work. It drives how they allocate their time and resources.
- As with any strategy, it is not that people are necessarily doing bad things, it is just that they are not doing the right things, what is optimal to achieve the strategic goals of the company.
Reasons to have a valuation driven strategy
There are many reasons to maximize the valuation of your company. Here are a few reasons to have a Valuation Driven strategy. How many of them apply to you?
- Prevent leaving money on the table during a sale at some point in the future
- Avoid overpaying in the case of an acquisition using issuance of stock
- Not giving up too much control in the case of investor buy-in
- Inability to attract an optimal buyer
- Inability to attract a strategic buyer
- Partner buy-in
- Partner buy-out
- Shareholder disputes
- Obtaining a line of credit
- Planned Recapitalization
- Obtaining loans
- Estate Planning
- Inability to fund a retirement
- Ability to act on unplanned opportunities such as acquisitions, new markets
- Sudden life events: incapacitating injury or illness, death of key member, divorce
- Ownership transition – family or partners
- Litigation settlements, shareholder, tax, etc.
- Semi-retirement & hiring professional management
- Management team incentive plans
- Insurance coverages
- Succession planning
- Implementing new advisory board or board of directors
- Recruiting A players
- Organizational assessment and reorganization
- Negotiation with key suppliers
- It dramatically raises the probability of attracting a suitable buyer or investor. It can be the difference between success and failure.