By: Mark Gaeto – Managing Partner, Conrad Olenik – Associate
This material was presented by Mark Gaeto and Ted Stack earlier this month in a webinar for Delaware Trust’s Private Equity Networking series. If you’re interested in learning more or watching the recorded presentation, please reach out to Conrad Olenik at colenik@falconllc.com.
In the world of M&A and financial valuation, every dollar of value within your business counts. The simple ways to improve value include boosting sales and cutting costs, but in reality, there are significant challenges and important strategic options that must be addressed to truly develop a valuable business.
There are a number of tools and strategies for finding and extrapolating hidden value between the numbers. This is a sum-of-all-parts evaluation and will at times resemble a “McKinsey-esque” consulting approach or a Big 4 accounting mindset, with the additional benefit of the knowledge and experience from former business owners and operators.
Before we begin, it’s important to reflect on why this hidden value matters. You need to define your goals and objectives to properly align your overall strategy and ultimately drive value. This includes assessing your priorities: sale/merger, recapitalization, capital fundraising, growth and retention, or any combination of the above. It also includes thinking about the timeline of events, as most priorities vary in the length of commitment and resources. And finally, it includes an important analysis of your overall considerations: the risk/reward balance of near-term liquidity and long-term upside. Once the personal goals and objectives are established, or are at least in the forefront of your daily mindset, you can begin setting the strategic growth vision and looking to unlock the company’s hidden value. Whether you’re hoping to exit the business or not, your growth plan becomes the exit plan, so this exercise is valuable for all participants.
Craft a Strategic Growth Vision
The Strategic Growth Vision (SGV) is a plan of action that serves as a road map for management to answer three critical questions: “Where are we going?”, “How will we get there?”, and “Why will we be successful?” The process of answering these questions includes both internal and external assessments geared towards analyzing the enablers, constraints, threats and opportunities. The level of detail built into this plan will impress any and all future investors with proof that you’re thinking as a major corporation, whatever your size and stature. With goals and objectives defined and the strategic growth vision planned and documented, you can begin to unlock the hidden value in your business.
The first step to unlocking hidden value lies in the financials. In a nutshell, you need to clean up your books and get more granular with the data. Wrap your head around the financial statements and dive deeper to fully understand what’s happening in your business. You should be able to quickly and easily tell someone the exact cost of each component of your product or service, the cost of acquisition for a new customer, the rationale behind the pricing strategy, and the onboarding costs for new hires if you launch a new business line or ramp up the client base.
On the revenue side, the customer concentration and retention statistics are powerful messages that can tell a good or bad story. Who is actually driving revenue? Is it a specific industry, a certain geographical region, or maybe a single star sales rep? Is the revenue recurring, is it packaged or bundled, are the product lines generating significantly different margins? These types of questions can only be answered by understanding the full economics of your business and will allow you to unlock value in the company moving forward.
Analyze your market
After the financials have been assessed and understood, you can take a step back to the overall strategy of the business. Characterize your market by evaluating the external trends that are impacting the strengths and weaknesses of your business, such as market size and competition. This includes not only your core market, but also the surrounding adjacencies across geographies, products/services and channels/segments. Investment bankers specialized in your field can often provide great assistance in this process, given their intimate knowledge of the market and its transactions.
Other strategic value can be found in the intangibles, as IP can often become a negotiating lever that boosts the company’s price by itself. You should perform the analysis to determine the cost/time to buy vs. the cost/time to build, so you can realize what a strategic buyer might be contemplating. While IP value tends to be found in the software sector, other companies can achieve this intangible boost with well-documented product management or launch processes, unique methods or procedures, and a reputable brand with strong goodwill. These factors are important and can provide significant hidden value to a financial buyer and especially to a strategic player.
The final piece to the puzzle of unlocking hidden value can be found in the operations of the business. It’s important to take a look at this after tackling numbers and high-level strategy so you have the proper perspective when getting your hands dirty with how the business runs. To grow, you need to manage and measure. The management function involves developing an excellent leadership team, assigning accountability, and aligning incentives to drive goals for success. The measurement function involves documenting systems, processes, procedures, and reporting metrics to ensure financial discipline. When this is communicated across the team and consistently understood within the organization, the result will be growth with improved margins, increased revenues and a larger share of the market.
Once you assess your personal goals and objectives and plan the vision for the business, the hidden value can be found and unlocked in the financials, the strategy and the operations. The process we’ve outlined above is a very thoughtful exercise that will provide value to your business, whether you’re looking to sell or not. Thinking about an exit is a good way to plan for the future, as the road map will lead to growth in the meantime. As CEO, you will lead this endeavor, and a good banker can help structure, manage and quarterback the project. The most important part is to begin now.
Mark Gaeto is a managing director with Falcon Capital Partners, a leading mergers and acquisitions firm, where he directs their commercial technology practice.
Conrad Olenik is an associate with Falcon Capital Partners and began his career with JPMorgan Chase.
Mark can be reached at 610-989-8903 or mgaeto@falconllc.com.
