Value creation is the backbone of building a successful company. A company’s sustainable and profitable growth creates business value. This type of growth occurs through robust, streamlined processes; a functional, efficient operational structure; and strong, competent management and leadership teams. While aligning the business owner’s vision for value creation with their planned exit is essential, the real challenge is executing this vision within the available timeframe.
Clearly defined exit ambitions don’t automatically translate to having a clear value creation strategy. Most business owners are occupied with running their businesses or capitalizing on market opportunities. They focus primarily on running their businesses and are mistaken if they believe that their business exit will happen organically without hassle when the time is right.
The most critical aspect of understanding value creation is the business owner must be ready to execute their business exit and take advantage of opportunities that come their way.
It is never too early to start preparation!
Building business value helps to establish a business from start-up to maturity. That same process makes the business fit for exit planning. For sustainable business growth, customer acquisition and customer retention are essential to having a forward-looking value proposition. This requires having an actionable business growth strategy, a steady and growing pool of skilled workers, and an expandable organizational structure.
What Is Value Creation?
All businesses have one primary aim: value creation. Value is created when customers choose your products and services over others in the market. In addition, value for the business owner and shareholders translates to an increase in the stock price and availability of capital to fund business operations.
In a nutshell, value creation occurs when a business utilizes its resources to build something of value that it sells to its customers. The company, in turn, earns a profit from what it has created and sold, and the profit is further utilized to fund the business operation.
The first step toward value creation is understanding what drives value within the business, industry, and the market. When business owners understand the value and how it’s created, they invest capital and talent in exploring profitable business growth opportunities.
For instance, if a company’s customers demand and expect consistent quality and timely delivery of its products, then the people, processes, and systems that manufacture and dispatch those products are of utmost importance. Similarly, if the customers demand innovation and high performance, then the people, processes, and systems that build such products of high quality and functionality are of high value.
“The core of value creation strategy is a consistent alignment of actions and capabilities with the customer value proposition.” – Strategy Maps: Converting Intangible Assets into Tangible Outcomes by Robert S. Kaplan and David P. Norton
Business owners must consider the following three key factors for value creation.
3 Things to Consider When Starting
1) What is your business currently worth?
Most business owners expect to sell their companies at the best price possible. However, an owner’s estimate of future value is nothing more than a guess if they don’t know the company’s current value. Learning that the “guesstimate” is nowhere near close to the company’s current value comes as a rude shock.
To put focused effort toward business value creation, knowing the gap between the current business value and the needed future value is essential. The only way to calculate this gap is to know what the business is currently worth. Therefore, a business valuation helps determine an accurate value of a company with all its counterparts.
Business valuation also identifies the company’s essential, value-generating areas. To put focused effort toward value creation, it’s necessary to know which business aspects are lagging and whether these areas could be of specific interest to a potential buyer when the time comes to sell.
Business valuation also helps business owners:
- Acquire a better knowledge of company assets. This information helps them ensure proper insurance coverage and know where to reinvest in the business.
- Know the actual value of the business. This is often a deciding factor if the owner wants to sell the company to an external buyer.
- Track business income and its valuation growth over time. Buyers prefer a company that shows consistent growth.
- Get investors on board. If the owners plan to seek investors to fund growth strategies, prospective investors want to see a complete and current valuation report.
2) Where and what are the priorities?
Business value is created through strategic inputs that consider the existing business model, capital, and available resources. However, there are other aspects to consider as well:
- In which segments do you compete (product and service segments, regional and market segments)?
- What risks and opportunities are associated with your company?
- How do you procure resources? What changes, if any, are needed to make your business more sustainable and resilient?
- Do the products and services meet customer expectations and demand?
- Do you have any other collaborators or partners in value creation?
These pivotal questions primarily address how your value creation objectives fare in the long run. Other essential personal aspects to consider include:
- Can you maximize the business value per your expectations? If yes, how do you intend to do so? It is difficult to answer these questions without a thorough assessment of operations, past financials, and existing processes by a certified exit planning advisor to create value creation strategies.
- Is your exit timeline flexible? Do you have to plan your exit now? This information is needed to decide which value creation strategies should be prioritized over others.
- Do you have plans post-retirement, such as philanthropic interests? Or do you intend to use the exit earnings to fund another venture?
- Lastly, what about your legacy goals? What do you want from your exit? And what help do you need to get out of the business? Are you primarily concerned with making a substantial profit, or are you eager to leave your mark through your vision and mission for your company?
Answering these questions will help you make informed decisions about critical processes, people, and performance.
3) Understand how much value-specific tasks will provide your company.
An exit plan succeeds only when the value creation strategies close the value gap. However, assigning value to specific value creation initiatives can be difficult.
Even if you know the outcome of a growth initiative, assigning a set value to the outcome and estimating how this value will fit in the overall value growth target is not easy. As the circumstances around the business change, the initial exit strategy will require adjustment. Use benchmarks in case of unexpected events.
Value Scout’s Value Recon feature can help estimate the value of value creation initiatives to determine what creates the most value for your company. With Value Recon, one can assign value to a given task. It also prioritizes tasks by pointing out the most significant value creation opportunities. This way, business owners and advisors can gauge their personal or client’s performance levels by people, initiatives, departments, and processes.
Value Scout Simplifies Value
Value is complicated. Determination, creation, and delivery of value depend on myriad factors:
- Customers/clients, investors, and stakeholders define a company’s value.
- A company’s vision and mission, business strategy, operational models, capital, and human capital create its value.
- The delivery of products and services to customers at the correct prices and through the right channels delivers value to the business owner and stakeholders.
- Timely reinvestment in people, processes and products sustained, protected, and built value.