All business owners—no matter where their company is in its life cycle—want to enhance business value, often referred to as enterprise value. Enterprise value refers to the value of the whole company, including the combined value of net working capital, long-term debt, and equity—all at their respective market values.
Business owners seeking funding, preparing for an IPO, gifting, considering a change in ownership, selling a business, or even resolving various disputes, should start by figuring out the worth of their company. One of the best ways to proceed is with a business valuation.
Calculating enterprise value requires thorough analysis and a detailed review of facts and industry indicators specific to the business. Just as every business is different, the results of a business valuation vary and are dependent on why the valuation is being calculated. So, while it isn’t uncommon for a business owner to see enterprise value as the ultimate measure of success, the complexity of the process, industry nuances can be overwhelming.
A better approach is to view the valuation exercise as an opportunity to develop an ongoing relationship with your valuation professional and periodically benchmark your organization, its behaviors, and its approach to the market. Revisit your valuation findings regularly—annually when things are running smoothly, and more frequently when monitoring the implementation of strategic initiatives and the team is achieving key performance indicators (KPIs) that are value based.
The process of assessing and potentially enhancing your company’s value can be simplified into this four-step approach.
1. Conduct an As-Is Process Analysis
What’s an As-Is Process Analysis?
An as-is process analysis is an evaluation of current practices that identifies and quantifies a business's current processes against those of the industry and its direct competitors. This, coupled with a risk assessment analysis that’s focused on an entire organization, can provide a comparative view into how an organization creates value, areas where further gains are possible, and activities that are currently destroying value.
Areas frequently studied and identified for improvement include working capital management, business processes, supply chain management, new client acquisition, customer retention, vendor relationships, asset efficiency, and risk management. These factors all have a direct impact on the three fundamental drivers of value—risk, profitability, and growth.
What Are Benefits of an As-Is Process Analysis?
It’s important to measure what drives value. Until management understands what’s driving those fundamental elements, the team can’t fully grasp how KPIs should be defined and in which order they should be prioritized to increase value. It’s common for KPIs to become outdated and not focus on the primary objective. For example, in a manufacturing process, a KPI that focuses on output may have not have been modified over time to reflect an increase in scrap rate, which can negatively impact both margins and reputation.
While internally focused evaluations are frequently conducted, the perspective of an outside expert can be invaluable. They can analyze your company from an unbiased stance and help you ramp up your efforts by focusing on value-creation areas that will have the greatest impact.
2. Undergo a Focused Benchmarking Analysis
A benchmarking exercise, through the lens of a comparable company or industry peer group, allows management to identify areas within the organization where improvements in enterprise value are possible. The benchmarking exercise applies industry best practices to evaluate company performance against data from comparable businesses.
The analysis answers the following questions across the organization:
- Is your X process better than, comparable to, or worse than the industry peer group?
- How much value will result from making improvements?
How Do You Account for Company Differences?
Normalizing adjustments for underlying fundamental differences between companies’ processes and related variables is important. As an example, owned versus leased equipment may significantly impact earnings before interest, taxes, depreciation, and amortization (EBITDA) simply due to the accounting conventions while having no real impact on the return to shareholders.
An experienced professional will seek out high performing organizations across the spectrum of relevant metrics within your industry group to help you develop a portfolio of best practices to target.
What Outcomes are Derived from a Comparative Company Analysis?
The comparable company analysis allows you to distinguish between operations and practices you should continue, those you should reassess, and ones you should abandon.
For example, you may discover that the industries you serve pay invoices in bimonthly pay cycles, and that your offer to buyers is a 2% discount on trade credit if the amount due is paid within 10 days. After the first 10 days, the full invoice amount is due in 30 days without the 2% discount according to the terms for 2/10 net 30. This practice is outside the peer group norm, effectively creating a very high cost of funds for five days of liquidity. Other business areas that can be understood and improved at a granular level with measurable differences in value include:
- Inventory turns
- Working capital management
- Capital equipment efficiency
- Personnel costs and multiple shift analysis
- Capital structure and borrowing rates
3. Identify and Refine Performance Metrics
Setting relevant strategic and tactical performance metrics provides a system of accountability and helps your team focus on what’s key for reaching business goals that drive value. This is why it’s critical to measure what matters.
As leadership and management review the findings from the as-is process model and benchmarking analyses, you’ll be asked to consider multiple viewpoints. Invite your executive team, valuation consultant, and department leaders into the conversation.
How Do You Leverage Department Insights in the Assessment?
Once your team has agreed on the areas for evaluation, assess the following:
- Impact. How much value can be created through the effort required to go from poor to good or good to great?
- Cost. What resources will need to be dedicated to help minimize disruption during the business process improvement project, including technology, management, staff, and professionals?
- Timing. How long will each project take, and how variable are the efforts and outcomes?
Armed with the estimate of the potential increase in value and the time and costs to undertake the individual projects, management has the tools to make informed decisions. Using this framework can help you make solid, data-backed decisions about which tests can make a true business impact.
4. Evaluate Actions that Create the Most Value for Your Business
Once you identify benchmarks and develop some comparable scenarios and intel, the real value building begins by analyzing what actions will create measurable change.
While every organization is different, some common macro-level areas of focus include measurables that enhance profitability through revenue and cost intelligence, reductions in organizational risk through capital management, and the increase of profitable growth.
Armed with valuation intelligence, insights into the actions of your competitors, and a knowledge about your own organization, you can address and positively impact metrics that directly lead to strong value-adds throughout the business.