Have you begun your value creation journey? Value is the backbone of a business. Without it, your unique offerings may be just another commodity in the market and the eyes of customers and investors.
Not only must a business create value for its customers but also its stakeholders, employees, suppliers, and investors. Value creation converts your resources into something of value.
What Is Value Creation?
Value creation is the process of creating business value (often in preparation for an exit). Value gets created when a company generates profits.
Stock price increases create value for shareholders and ensure the availability of future funds. Offering products and services that fulfill the needs and wants of customers creates value for them. Providing consistent or growing business creates value for suppliers. Adequate training and growth opportunities create value for employees. And the reasonable market value of the business helps create value for its owner(s).
Companies often ignore the importance of value creation and go for quick fixes, like rapid acquisitions, to maintain growth, which fails to create long-term value with quality sales and a loyal customer base. This short-term mentality serves to destroy value rather than create it.
3 Tips for Value Creation
1. Know Your Company’s Current Value
We preach this a lot, but it truly is one of the best pieces of advice. Knowing where to start helps you understand what you are working with. Most business owners overrate their business value. They are in for a rude awakening when they get their business valued, as the current worth of their business is much less than what they expected.
A professional business valuation process helps a business owner identify their company’s CMV (current market value). It serves as the baseline value or the starting point for the value creation journey. It also gives a better understanding of the assets and liabilities of the company, its strengths and weaknesses, and which resources can be better utilized to create more value.
The best way forward is to base the value creation journey on the current market value. You cannot know which way to go unless you know your starting point and ending point. The starting point is the current value of your company, and the ending point is the target value you wish to create. The difference between them is the value gap.
Your value creation journey should focus on filling the value gap. All value creation initiatives should work towards this goal.
2. If You Plan to Exit, Know How to Exit
Knowing the best method to exit your business can help shape your value creation plan. Be clear in knowing what you want for yourself and what you want for the company when you exit.
An exit strategy facilitates the successful transition of ownership and clearly states the method of your business exit. You may exit in various ways, such as:
Mergers & Acquisitions
M&A deals form strong exit options for private business owners. Prospective buyers who acquire or merge with your company are interested in increasing their geographical footprint, eliminating competition, and acquiring your products, infrastructure, or talent.
M&A deals provide you, the business owner, with the flexibility to negotiate your terms and price. However, M&A deals are complex and time-consuming.
Sale to a Partner or Investor
You could sell your stake in the business to a “friendly buyer” such as a partner or a venture capital investor. This allows your company to run as usual, with minimal disruption to the business. Revenues remain steady with this exit method. However, it is often difficult to find such a buyer, and the sales price may not be as lucrative as in an M&A deal.
Suppose you want to keep your business in the family; the family succession exit option is ideal. Also called a legacy exit, this method allows you to pass down your legacy to someone within your family.
When opting for family succession, it is essential to ensure that the person who replaces you is well-trained and capable of shouldering all your responsibilities. That person should be able to grow your business and take it to the next level for it to thrive. Family succession allows you to remain involved as an advisor or consultant with the business.
Management Buyouts and Employee Buyouts
In this method, existing employees or the management team assume the leadership roles and continue to run the business. It gives you confidence that your business will continue to flourish and your legacy will remain intact.
It is a straightforward exit method, as there is no involvement of a third party. However, finding such interested members within the organization may be difficult. Also, sudden, massive changes in the company’s leadership may negatively impact the business.
To secure the future of skilled employees, you may choose the “acquihires” option of business exit. Acquihires is a type of acquisition in which the acquiring company is solely interested in the target company’s talent, so you can ensure that your people will be well looked after.
Finding this type of prospective buyer is difficult and can be a challenging and expensive process. However, if there is someone solely interested in acquiring your company’s expertise, you could strongly negotiate a premium sale price.
IPO (Initial Public Offering)
With an IPO, you take your company to the public and sell shares as stock. This has the potential to earn substantial profits compared to any other exit method.
However, an IPO entails high regulatory costs, intense and continuous scrutiny of shareholders, and mandatory progress and performance reporting requirements. It is a very costly and labor-intensive process with tough due diligence.
Liquidation best serves failing businesses. In this option, a business ceases operation and sells all its assets. The proceeds from selling the assets are used to settle all liabilities (including payments to debtors and shareholders).
This method of exit is simple and fast but not high-paying. In opting for this exit route, you break ties with your partners, employees, suppliers, and customers.
Filing for bankruptcy is the last resort for a failing business. When a company cannot settle its liabilities even after selling its assets, it can file for bankruptcy. The assets will be seized, and you will be relieved of your business debts. However, bankruptcy harms your credit, and you may find it difficult to borrow funds in the future.
3. Have a Team
Having expert advisors to guide you through your value creation process can help keep you on track and create more value.
Create an advisory team comprising in-house and external advisors from different professions, such as attorneys, financial experts, CPAs, bankers, etc. Know which advisors are responsible for which specific elements of your value creation and exit plan.
The advisory team can help you attain a successful exit with the help of the right tools, team approach, efficient project management, giving proper credit to each team member, and using data for the business owner’s benefit.
It can be tough to start a value creation journey, which may be a complex process full of challenges. However, you can simplify and accelerate your value creation journey with the correct advice and the right tools.
- Know the current market value of your company to get a starting point. Identify your value gap by comparing it with your target value or exit goals. Focus your value creation journey on filling that value gap.
- Know the method of your business exit, as it will guide the value creation journey.
- And finally, engage a team of advisors to guide you through the value creation journey and ultimately to your desired exit.