Helping Clients Grow, Part 2: Growing Private Company Equity Value

Posted by George Sandmann on Apr 23, 2019 11:49:00 AM

Growing Revenues vs. Growing Equity Value: Learning the Differences

Part 2 of 3: Growing Equity Value, helping CEO clients excel 

Recap from Part 1

Strategic Planning, help client grow revenuesThe top three advisory goals2 reported by CEOs are:

Goal 1: 'Grow' (59% of clients want to increase revenues and profits)

Goal 2: 'Strengthen Operations' (20% want to make the company easier to run), and

Goal 3: 'Prepare to Sell My Company' (19% want equity planning or to prepare for M&A due diligence).

  • ‘Grow’ and ‘Prepare to Sell’ are actually both “growth” engagements. Why? The first CEO wants to grow revenues; the other wants to grow equity value
  • According to data from Pinnacle Equity Solutions1 83% of “Prepare to Sell” CEOs actually need to grow revenues in order to create the equity value they need to fund their personal wealth plans. Meaning, they set out to sell their company and end up needing to grow it
  • Inescapable conclusion: most clients want/need planning engagements that deliver revenue growth
  • Growing revenues grows equity value, but not vice versa
  • Equity value growth is not dependent on revenue growth
  • This article discusses growth planning, or being the architect. A Business Advisor acting as general contractor helps the CEO convert the plan into reality --can be the same person

Growing Revenues vs Growing Equity Value

In Part 1, we saw that value drivers have different levels of priority, determined by the CEO’s goal. In preparing the plan, the business advisor needs to prioritize the areas of the business which will be included in the growth plan: Lower Priority, Priority, or High Priority.

Chart 4: Relative Priority of Value Drivers by Engagement Goal 

Screenshot 2019-04-17 at 15.24.47

Growth planning is comprehensive planning, as opposed to subject matter planning. Subject matter planning strengthens one value driver in a silo. Comprehensive planning considers each value driver as a gear, connected to the other gears in the engine --giving the client holistic control of the entire operation.

Building on Part 1’s discussion of Growing Revenues...

Goal 2: Growing Equity Value

The strategy-centric planning required to grow revenues differs in complexity from the transaction-centric planning to grow equity value and preparing a company for sale. Assume here that the client is preparing for sale to a financial buyer, as opposed to a strategic sale. In this transaction, the buyer’s assumed motivation is to purchase the company and step into the seller’s shoes to grow revenues, generating a return on their investment.

This article will not delve into the details of the equity planning (exit planning) process. To learn about equity planning, please refer to one of the outstanding organizations that trains in the discipline. A leading example is Pinnacle Equity Solutions, Inc. and their Certified Business Exit Consultant credential, led by founder John Leonetti.2 There are a large number of highly qualified CBECs, CEPAs and CExPs who have specific expertise in planning for the orderly transition of ownership --this is a valuable and growing field.

From a straight due diligence perspective, what should Toplift bring to the deal table to get maximum price from a financial buyer? If the seller’s M&A pro includes an operational analysis in their opinion of value, the analysis shows the seller the risks preventing conversion of full equity value into price, and as importantly where to focus time and treasure to capture latent value prior to close. The operational analysis also becomes the basis for the growth plan delivered to the buyer.

As with Revenue Growth, Equity Growth is complex, and benefits from planning for the same reasons --hence the exit planning profession. Converting latent value into maximum price further requires specialized outside expertise --for example transactional legal advice and accounting. Collaboration with these experts is at the heart of the equity growth plan.

Here is the priority of the value drivers for a company planning equity growth:

Chart 5: Relative Priority of Value Drivers for ‘Grow Equity Value’ Engagement

Screenshot 2019-04-17 at 15.26.21

Two facts jump off the page: only two of the eighteen value drivers are 'Lower Priority.' There are 5 ‘High Priority’ value drivers, as follows:

  1. To get a top price, Toplift will need to show that they growing faster than the competition and the market --Growth value driver
  2. The company needs to deliver a book including a well-organized and documented profile with an industry description, high level year-over-year sales and gross margin reports, company history, location of operations, employee count and make-up, corporate and legal structure, and the accountants or lawyers advising the company3 --Company Overview value driver
  3. The company’s financial books and processes must be audited, with systematic and documented policies, processes and reports --Financial value driver; note also the need for a transaction-savvy financial advisor
  4. The buyer needs high confidence in their ability to generate and grow future sales: Toplift must have a proven, documented sales and marketing process that can be replicated and scaled --Sales & Marketing value driver
  5. There can be no litigation, all IP should be protected, all company books and minutes in order, regulatory filings complete, etc. --Legal value driver; note also the need for transactional legal advice

If you are helping a client who is preparing to sell their business, you need to understand the company's value, the risks to value, 

Equity planning can also provide for creating a revenue growth plan through which the seller explains to the buyer how they will generate an ROI (and that future revenues are low risk). Refer to the high priority and priority value drivers as a pick list of plan elements.


  • 80% of CEOs want or need to grow revenues and value
  • Clients benefit from growth planning due to the efficient deployment of expertise and capital delivered by the planning process --maximizing engagement ROI
  • The business advisor is the architect, delivering a blueprint for growth; the business advisor can also act as a peer to the CEO, helping to manage plan execution
  • Growth engagements include defining a clear goal, analyzing the client’s value drivers, and delivering a plan to strengthen weak drivers
  • Revenue growth engagements can be more complex than equity growth engagements; capital is a growth limiter to be accounted for in the plan
  • There are standardized methodologies, technology and training that support the business advisor winning growth planning engagements and delivering client growth results
The End.
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[1] Courtesy Pinnacle Equity Solutions, results of Business Exit Readiness Index™ surveys performed by Certified Business Exit Consultants with owners of ~2,000 middle market companies. ©2016-2019 Pinnacle Equity Solutions, Inc.

[2] Leonetti, John Exiting Your Business, Protecting Your Wealth: a strategic guide for owners and their advisors. Wiley & Sons, 2008.

[3] CoreValue® Driver 10:1 Business Profile. ©2012-2019 CoreValue, US Patent 9,607,274

Topics: Standards and Best Practices, operational value, Growth Advisor

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