Strategy 3.0: Valuation Driven Strategy for Middle Market Companies to Increase Shareholder Wealth & Stakeholder Value

Have you noticed the changes? Strategy 3.0? I’ve been pondering the changes in strategy over the last few decades and have seen significant transitions. In trying to trace the origin of my own interest in strategy, I think it goes all the way back to when I was a kid and dad was a builder, developer and farmer all at the same time. Even as a farmer, he was doing cattle, corn and wheat simultaneously, because that’s what smart farmers did.

And then, through the military and into the Fortune 500, marketing, product and corporate strategy. Finally as an advisor to CEOs and senior management teams for the last couple of decades. So my perspective of strategy is from the farm to the board room! There some ironic humor in that!

My thumbnail assessment of Strategy 1.0 was that from my first exposure until recently, it was transaction based. Build the house, develop the land, raise the cattle, win the battle, launch the product, build the plant, advertise the new product, and make the profits.

Strategy 2.0 came along around the turn of the millennium, give or take, and it became, start a conversation, develop a relationship, offer a product (transaction) and make a profit. It’s kind of where strategy is at the moment.

Those strategies still have merit, and we are extremely well versed in those, but as we look at the middle market from the 100,000 ft. macroeconomic level, we see an interesting phenomena. Over the next 10-15 years, the baby boomers who own companies and control trillions in wealth and employ the bulk of the workforce in the US holds one of the keys to the economy: how successfully the businesses they have built are transferred to the next generation of owners, be it strategic or financial buyers or family.

A multitude of surveys (including a recent one the Hartford business Journal) indicate that while the vast majority of middle market business owners are counting on selling their businesses to fund retirement and believe they can sell when they want, the hard reality is that only a small percentage will be successful at doing so. That does not bode well for the economy at a macroeconomic level. Vast amounts of wealth are threatened to vanish in a sea of companies sold at huge discounts if they sell or transfer at all.

Succinctly, the story of an investment banker who was a business owner for 20 years illustrates the problem. He and his team focused on growing the large and apparently successful business, concentrating on the sales and profitability almost exclusively. When it came time to exit, he told us he was shocked to find out that his business was worth a mere fraction of what he had counted on, a high multiple of EBITDA.

He had ignored some of the critical valuation drivers that can either add a strategic premium or, in his case, a negative discount for risk and uncertainty to the financial valuation. He believed the common myth that he would get his industry average of times EBITDA and all he had to do was focus on sales and profits.

Why is it that two companies in the same industry with nearly the same sales and profits can sell at drastically different prices? In one case, our friend at 2x EBITDA and the other at 18x EBITDA? It is all those non-financial valuation drivers, whether it be management, customer concentration, new products, recurring revenue, etc.

How about the case we know of with an $80 million company that is virtually unsaleable, not because of sales or profits, but because the majority of the valuation drivers are so negative that it repels investors – the risks and uncertainty factor is off the charts. Investors want consistency and predictability of future earnings.

Enter Strategy 3.0: Valuation Driven Strategy that has its roots in the predecessor methods, but takes it to the next level for middle market companies to maximize their valuation using the 40+ valuation drivers we have identified to drive strategy, a rigorous process to implement, and track the improvements with the Invest-Ability Index™ on a dashboard. Now all business decisions are viewed through the prism of the Valuation Driven Strategy to maximize company valuation, increase shareholder wealth and improve stakeholder value.

We believe that every middle market company, regardless of stage or ownership, should be using a Valuation Driven Strategy to maximize their valuation. From millennials who need to start strong and finish strong to the boomers who need to finish strong, and everyone in between.

The reality is, that it does not take that much effort and the payoff is enormous – for most middle market companies, it is in the millions at deal time, whenever that is. The sad part, only a minority will take the time and effort to do it.

In the next 10-15 years in the US and Canada, there will be far more sellers than buyers, so it is critical to anyone thinking of selling within that time frame to be among the best prepared as the competition for financing dollars will become fierce.

It is imperative to have a Valuation Driven Strategy to maximize the valuation and be at the top of the pack in terms of preparation. Those who do not will be at a HUGE disadvantage come deal time. One investment banker recently said those who do not prepare will get 2-3 times LESS at deal time than those who are prepared.

If you are interested in learning more, visit us at and sign up for our next free webinar. Reach out and contact us, we would love to hear from you.

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