Why are some companies worth more than others when the numbers appear the same? Why do some companies receive a 7X multiple and others receive a 4?
Recently I was at a presentation by a Texas Private Equity Group (PEG), a financial buying group of businesses to get insights into how they evaluate companies. They showed us their template of analysis.
They ranked several different categories on a scale of zero to a 100. They assessed the score of where the company was ranked in their opinion. Then they asked the question of how the company would measure after they put their systems and strategies in place. For the PEG it would produce a delta of value creation. The higher the delta of change the higher the upside potential of the company. Said another way, the higher the delta the more risk associated and thus the valuation of the company goes down. So, let’s look at just two of the categories they used.
- The Management team: How good is the leadership team?
Can your management team decide or implement a plan? If they can, what do they base that decision on? What process do they use? Is it system based or is it seat of the pants? Is there strategy they use as a framework for the decision process?
Can your executive team call the president of your potential client to develop business or resolve a problem? Do they have that kind of industry reach? Where would the industry rank your team? Has anyone on your executive team built a company like yours before and do they have the autonomy to implement their strategies. Can your management team articulate their plan?
Strategic planning is a fundamental approach of the PE Industry. Since improving the delta is their mindset. Why are you not thinking that way?
- The Company Marketing Strategy: How critical is the marketing of your company?
Let’s start with its position, how do you rank with your competition? Can the company defend itself from disruption? Are you moving up the ladder taking market share or are you losing market share?
How are you measuring your marketing strategies? Do you have a customer relationship management (CRM) system in place? A good CRM should provide you data about existing and potential clients measuring your marketing efforts. Is there a real sales and marketing strategy or are you just hoping the phone will ring? Do you have a sales team that communicates your value proposition?
The goal is to bring predictability to your marketing efforts where dollars in equals scalable dollars to the company.
Notice, none of this is about the owner but rather it is about the company. If you are an owner of a company, ask this question “When you leave how would the company perform?” If you are integral to the survival of the company, you have created job security but not an autonomous business.
If you want to create organizational value think like a private equity group. Think systems for your business. Get with your advisors and trusted team and develop your corporate strategy. Learn how to acquire the talent and the systems that helps the company to become a leader or thrive in your industry. Honestly assessing and measuring your company allows you to identify areas of need. This should inspire a plan of action. Remember your goal in business should be to maximize your corporate value.
Sponsored in part by:
George Walden is a Managing Director and Principal in Corporate Finance Associates’ Houston office with twenty-five years experience as a middle-market investment banker. George is a member of CFA’s equipment industry practice group and an expert in the precision machining industry with special emphasis on manual machining, CNC precision machining, and gun drilling services and has been responsible for several industry-leading transactions. You can learn more about George HERE.