Value creation is fundamental to every business, be it a company looking to grow or the one going to market. An ongoing business needs to create value for its customers, employees, suppliers, investors, stakeholders, and community. And if you are a business owner looking to sell your company, then you need to create transferable value.
Transferable value is the worth of your business in the eyes of potential buyers. It helps your company transition following a merger or acquisition. It does not refer to how well you run your business but to how well it runs without you.
Ask yourself: Will your business continue to run if you exit today? If yes, then who will be responsible for running it without you? Would this happen with minimum disruption to your cash flows?
So, to create value, your business needs value drivers, the factors that build or enhance your enterprise value.
However, getting started may be the most challenging part of value creation—questions like what to do first and what matters most come into play.
4 Significant Pointers to Get Started
- Know your CMV
- Understand the value gap and what needs to be done
- Understand the value of your tasks
- Get recommendations from your advisor (or Value Scout!)
Know Your CMV (Current Market Value)
Without a professional business valuation, you cannot know your company’s current market value (CMV). Business valuation is determining the financial value of a business or an asset. It involves a thorough analysis of its capital structure, management, earnings, assets, customer base, products and services, brand, and much more.
The three common approaches to business valuation include the asset approach, the income approach, and the market approach. The asset approach of business valuation uses the company’s net asset value (total assets minus total liabilities) to conclude its CMV. The income approach derives business value based on the company’s ability to generate future income. It directly relates business value to the future cash flows that the business is expected to produce. The market approach determines business value based on the selling price of comparable businesses. Analysts use data of comparable private or public companies to conclude the CMV of a company.
Depending on your unique business and situation, professional advisors may choose a combination of approaches to conclude your CMV, which is the price you would get if you sold your company today. Knowing the CMV provides you with a starting point or a baseline value on which you can build your value creation strategy.
Understand the Value Gap and What Needs to Be Done
After knowing your CMV, compare it with your target business value or the value at which you would like to exit your company. The CMV is usually less than what the business owner expects or wants. The value gap is the difference between the current market value and the target business value.
You may base your value creation strategies on the value gap, which indicates the areas in your business that need improvement. This may involve changing your company’s internal operating conditions to meet the target business value.
Analysis of the value gap reveals the shortfalls between your existing business plan and your target business value. Use this information to take a new strategic direction and implement corrective actions to fill the gap.
Understand your strengths and weaknesses to gauge what you need to do. Strengths, also called the value drivers, are the elements or factors present in your company that help create or enhance value. Whereas weaknesses (i.e., value destroyers) are the factors that destroy or reduce your enterprise value.
The most common value creators include easy capital access, diversified customer base, economies of scale, robust financial controls, talented employees, favorable market environment, efficient branding, marketing strategy, product and service offerings, growth strategy, adequate research, development, etc.
The factors that usually destroy business value include poor working capital management, excessive capital expenditures, customer concentration, owner-focused management, bespoke product and service offerings, complex ownership structures, weak financials, no growth strategy, and unmotivated employees.
Understand The Value of Your Tasks
After you understand your company’s CMV and devise the value creation strategy, you need to know the value of various tasks (i.e., value creation initiatives).
While you know that your planned tasks will create value, it is essential to know how much value. You have given a quantitative value to your exit target, but not determining the value of your tasks leads to a trial-and-error exercise to achieve that target.
With Value Scout’s AI-assisted Value Recon feature, you can accurately attach an estimated value to these initiatives to understand their priority and how much value you can create by implementing and completing each particular task.
Get Recommendations from Your Advisor (or Value Scout!)
Professional advisors help articulate and plan your value creation journey. They provide customized solutions per your unique requirements. Advisors help owners identify the business goals and initiatives necessary to create the value to achieve those goals. They do all this keeping your interests in mind.
You may also get recommendations from Value Scout. The Value Scout platform gives you AI-assisted recommendations to help you determine a starting point as to what tasks you need to complete. Its algorithm provides customized solutions for your unique business. You also get to know the priority, level of effort, and the estimated value you can generate through the suggested tasks.
The AI-assisted engine also gives the user feedback on specific tasks that you, as a business owner, need to complete to increase enterprise value.
Start Your Value Creation Easily
Get expert guidance to start your value creation journey, plan it effectively, and execute it precisely to achieve your value creation objectives.
You can also use the Value Scout platform to commence and complete your value creation journey. You can take a demo of Value Scout, the AI-driven platform for value creation. Value Scout can also connect you with the top value creation advisors. Get in touch to know more.