Growing Revenues vs. Growing Equity Value: Learning the Differences
Part 2 of 3: Growing Equity Value, helping CEO clients excel
Recap from Part 1
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).
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
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
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:
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.
Recap:
We'd like to hear your ideas and comments, please post below or email blog@corevalueforadvisors.com
[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