Creating Business Value, Part II
A couple of months ago I told you about a good friend of mine, John (Read Part 1 Here). We had shared our life experiences together and built a strong bond over the years talking about our wives, families and businesses. At that time, John had just confided in me about his struggling business. He wasn’t sure how long he’d be able to keep his business afloat. Several of his biggest clients had gone out of business in the last 18 months. Several other large clients had been slow to pay their bills. And the worst was still to come, as one of his major accounts was on the verge of becoming insolvent.
As you may recall, John and I put our heads together and came up with a short term action plan for increasing his net income. The plan was to give his business a ‘shot in the arm’. John’s clients were all very typical of the 20/80 Pareto Principal… 80% of his revenue was being generated by 20% of his clients. It’s been almost two months since he put the plan into action. We met again this week over breakfast for a review.
With actions focused around the Pareto Principal, John…
- Asked 10 of his top clients for 1-2 referrals to others like themselves. After talking with the 12 referrals received, he will convert 4 to clients within the next 30 days.
- Increased his customer service level by announcing a new procedure that makes it easier for his clients to ask questions and talk with a ‘live’ person. New conversations have already produced several new business opportunities for which he is being paid.
- Announced a price increase for those clients utilizing basic products only. The new tiered pricing immediately increased income from smaller clients (and there was goodwill generated with the larger clients who had no price increase but were now aware of their discounts).
- Sold some of his accounts to a friendly competitor generating a small amount of additional revenue.
Maximizing Total Enterprise Value
With John’s short term actions bringing in much needed revenue, we decided to tackle some long term strategies for increasing his business value. John has been considering the possibility of selling his business, so we discussed timing and the Total Enterprise Value (TEV) of his company. The TEV is a figure that represents the “fair” price that would be paid when his company is sold. TEV equals EBITDA (earnings before interest, depreciation, income taxes and amortization) times A Multiple of Earnings (MoE). MoE is consistently applied to EBITDA to determine the value of a business and is usually applied by type of industry. The MoE is based on objective factors, but can be subjectively applied. The stronger the factors, the higher the multiple.
Planning is the key to maximizing the TEV of John’s business. Over the next three years, if he makes business decisions based on the above formula, he will significantly increase the amount that he puts in his pocket at the time of the sale.
John can focus on the following long term value creation strategies over the next 3 years:
- Increasing the multiplier is a function of increasing the actual and perceived value of the factors which impact the multiplier. Reducing the reliance of the business on John is one factor that will increase the value of the multiplier.
- Increased value is also related to direct improvement in operating results which can include sales, profits, EBITDA, improved processes, documented business processes, or new product development. John plans to focus a lot of attention on improving and documenting his current processes and new product development.
- Another value building strategy is to create channels of recurring revenues. This will increase the multiple on EBITDA for the business. John’s newly announced tiered pricing structure not only includes discounts for multiple product users but also creates several new on-going packages to entice recurring revenues.
- And finally, John plans to position his business (using mixed media delivery) as an industry leader in his niche to attract strategic buyers.
The value-building strategies John and I discussed are very realistic but rely on time for improvement before the business goes up for sale. John is willing to start now and take that time. I know John’s not alone these days in his struggles with his business. If you are interested in learning more about increasing Total Enterprise Value of your business or just want to discuss some creative ideas for increasing your business revenue, contact R.J. Kelly. There are strategies that will make a significant difference in the business value even for the most stable of businesses.
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Written by R. J. Kelly – July 2013