Are you within two years of selling your company? Now’s the time to generate as much value as possible to ensure you get the most out of your investment of time, money, and energy into your business.
Commanding a premium valuation is one of the most important objectives in any sale. Achieving it—and attracting the right buyers—requires clear evidence that you’ve built and sustained a healthy, scalable company.
Across the many unique businesses Class VI has worked with, we’ve found one constant among the most successful transactions: the owners prepared years in advance, and most used what we call the Value Creation Formula.
Following the Formula
The Value Creation Formula helps you view the true value of your company through an investor’s eyes. This perspective is important because business buyers are highly attuned to a company’s future potential—it is their perspective which ultimately drives the valuation of your business when you go to market.
Investors consider four key components as indicators of a company’s health and resilience, and these four make up the Value Creation Formula:
- A credible growth story
- A capable team
- Operational excellence
- Strong financials
I’ll give you a closer look at each part of the Formula in the sections below.
Growth story
M&A investors want to see your company’s whole arc from humble beginnings to a bright and profitable future. A good growth story is critical for convincing them to spend their hard-earned capital.
But sophisticated buyers naturally require verification. You need to present credible, verifiable data and analysis proving the truth of your growth story and why the business will continue scaling under new ownership. I’ve often seen a mismatch between sellers’ faith and buyers’ trust in that faith—believable historical trend data is the ticket to a great growth story.
Team
Nobody knows what makes your company tick like you do, but you’re just one person. To free up your focus for strategy and vision, you need a great team of executives with strong leadership and communication skills who can take charge of areas like finance, sales, operations, and technology.
Investors want to see most C-suite chairs filled before they commit. The company has a single point of failure if the owner is pulled in too many directions and responsible for too many key relationships—lacking a leadership team means leaving money on the table.
Operations
The daily grind of your business should run efficiently and effectively. This typically means data-driven decision-making and documented KPIs for each role at a minimum.
Additional procedures and metrics will depend on your company’s industry or even your individual business model.
- Do you manufacture goods? You might improve operations with automated workflows and regular, systematized physical inventory reconciliations.
- Deliver software as a service? You’ll need established and effective cybersecurity measures.
Financials
Businesses need revenue, and they must understand where the revenue comes from. Scaling a company requires the kind of increased cash flow and transparency that only effective financial management can bring.
Solid financials mean money flows in and is accounted for, with no unchecked fraud or waste, along with a diversified customer base without too much revenue tied to a few accounts. You also need to understand your costs and be able to demonstrate how you leverage those costs as you grow.
What does it mean for you?
The beauty of the Value Creation Formula is its universal applicability. Each dimension can adapt to the unique needs of companies across industries: I’ve used it to build value pipelines in organizations ranging from SaaS firms to pet food suppliers to manufacturers. It’s just a matter of applying varying fixes to fit the circumstances of a particular business.
Below are a few ways businesses might apply the Formula to increase growth and boost a valuation.
Enhance team and operations with a CTO
Every efficiency gain can mean more units produced or clients served at less cost. Technology often provides solutions to efficiency challenges.
A capable chief technology officer can support broader business goals by fostering innovative R&D and implementing policies for quick and cost-effective acquisition of tech.
Improve financials, operations, and growth story by tracking metrics
You need to measure the right indicators against a set of established benchmarks to know if you’re operating in peak form. Metrics can help chart operational effectiveness and financial performance over time, which are key threads of a business’s growth story.
Data gathering and analysis are areas where technology can vastly improve both inputs and outputs—buyers love to see clean, credible data.
Strengthen financials with robust controls
All companies can benefit from improved financial controls that reduce waste and decrease the chance of fraud. Important measures include monthly bank reconciliations, regular reviews of customer and vendor lists, and randomized audits of inventory and equipment at asset-heavy businesses.
An investor will appreciate your ability to plug any leaks so they can trust that they’re getting what they pay for.
Putting a structure and process to growth
If you’re approaching a sale or exit, applying the Value Creation Formula to your business helps you quickly understand the areas you can improve to earn a life-changing valuation. I’ve seen it happen countless times.
Start by honestly answering these questions:
- Are there gaps in the leadership team you could fill to ease some burden at the top?
- Are there steps in the production or development process that feel like they take too long?
- Have you shaped your company’s story in terms that appeal to an investor?
You only sell your company once. Use the Value Creation Formula to put the same level of diligence toward your exit that you put toward every other area of your business.
AUTHORED BY:
Chris Younger | CEO | Class VI Securities, LLC | Class VI Family Office, LLC
Chris co-founded Class VI in 2005 with a mission to Enable the Entrepreneurial Spirit. Sharing a passion for what entrepreneurs mean to our community, Chris and his business partner David Tolson felt they could do a better job for business owners and have had a great time helping clients ever since.
Prior to Class VI, Chris spent more than 20 years gaining experience in executive management, marketing, sales, law, and mergers and acquisitions.