Ultimately, most owners fail to exit on their terms because their business isn’t worth enough. They hire external consultants all the time to assist in entering new markets, growing sales, or driving operational efficiency. All those things ladder up to value creation. But shouldn’t they start there? Enter the value advisor.
To start, the value advisor’s role is to show clients the value of their business today, identify the value they will need at a specific future date to exit, and identify the gap between the two. From there, the best value advisors function like coaches–identifying and prioritizing value creation opportunities and helping owners pursue and achieve them. Many also bring consulting expertise (sales and marketing, operational, talent, HR) to drive value creation efforts.
Your job is to help your clients drive incremental enterprise value. You might do that through targeting top-line revenue growth, driving operational efficiency, improving organizational processes, improving HR systems, or all of the above. But, value growth is the objective, and you are the guide to make it happen.
Consider All the Value Levers
The central question in a value advisor’s mind must be: Does the business model predict success in five to ten years, especially if the owner is no longer there?
To do so, you must help business owners identify the measures that need to be taken to increase the company’s value. Some of them can be:
- Make business owners expendable. Can the company be transferred to third parties? Help make the company independent of the owner so that new management can continue business operation without losing sales. Documentation on strategic plans, processes and corporate responsibilities eases the transition. If the company’s success depends upon the owner, then the company’s value drops considerably.
- Identify non-essential assets. Determine what assets an acquirer needs to keep the business going. Which assets are owner-related and should or cannot be transferred? What debts are associated with these assets? Examine the revenues and costs generated annually in the company. Have value conversations with the business owners early and often.
- Simplify complicated tax structures. Complex tax conditions such as business split-ups or special business assets are risky at handover and unattractive to the buyer. Separate tax assets if necessary. Know that corporate restructuring needs to occur before the sale, as tax laws specify blocking periods for company sales after such measures.
- Identify and help the business owners end unprofitable businesses. The company’s value is determined by future income, which is discounted to the valuation date: the higher the anticipated future profits, the higher the company’s value. Companies often maintain unprofitable business units, sometimes for decades. These strain the entire company’s profitability and reduce the future earnings value on which the purchase price is based.
- Consider the possibility of a partial sale/partial transfer. Selling the company can also be done in parts. The share deal (i.e., the sale of business shares) is ideal for this purpose. The buyer has one foot in the door and can manage the financing at the same time. The value advisor helps the business owner integrate the buyer into the company. However, to minimize risks and remain flexible, you need to draft solid contractual agreements.
- Keep an eye on the business income and expenses in real-time. If your client intends to sell, then keep a watchful eye on the company’s success. Declines in profit or losses significantly reduce the company’s value. Especially in the three years before offering the business for sale, you must help the owner execute consistent countermeasures to counteract negative developments and critically examine risky transactions.
- Check the possibilities of an MBO (management buy-out). If your client does not have a successor and wants to sell to a third party, a management buy-out may also be an option. Help the owner identify or hire employees suitable to take over as new management. In this way, your client can get to know their successor and familiarize them with the company. The handover to managerial staff is a very successful practice in a lot of owner-operated businesses.
- Help the client choose between a share deal and an asset deal. In a share deal, shares in the company are sold; in an asset deal, individual assets are sold. The asset deal usually confers tax advantages upon the buyer, while the share deal is more tax-advantageous for the seller. Tax implications should therefore be taken into account when determining the purchase price.
- Implement a business plan for the next three years. Company valuation is an assessment of future success. The more precisely you can present and justify the future profitability of your client’s company, the higher the company value will be. So, as a value advisor, you must help your client translate their business goals into financial figures and show that the organization can achieve them (preferably with or without the owner).
- If possible, influence acquisition financing. Why should you care about the acquirer’s financing? Quite simply, if the acquirer cannot secure financing, they cannot purchase your client’s company. To facilitate the transaction, provide the acquirer with a transparent and verifiable company valuation, including underlying data. Invite the purchaser to participate in the financing meeting or arrange an appointment with a bank that already knows your company well.
See How Value Scout Can Help
Value Scout is the world’s first complete value creation platform. Entrepreneurs and their advisors use it to:
- Establish baseline value – More than an industry range, and Value Scout provides an accurate value based on our proprietary algorithm and human QA.
- Identify the value gap – The incremental value the business needs to be worth for the owner to exit.
- Identify value creation opportunities – With your client’s initial value, Value Scout provides a list of potential value creation opportunities along with a likelihood of success associated with each one.
- Plan and execute value creation programs – Tie value creation to your client’s annual business plan; break that plan down into quarterly goals and weekly tasks. And see it all in real-time.