Are you the value creation director of your company?

Creating value is arguably the most important initiative for any business. Yet leaders don’t always care as much as they should. Along with all their other responsibilities, they set value creation aside and assume they will achieve it by increasing revenue and improving profits.

Unfortunately, even healthy revenue and earnings growth doesn’t necessarily create value. Many other factors come into play. How does your business rank among its competitors? Is your industry growing, stagnating or declining? Do you own the intellectual property? Answering these and other questions about your company’s underlying value drivers brings you closer to where you need to be to truly determine your value.

Reed Phillips

We believe CFOs should see themselves as responsible for creating value. Since they already oversee the company’s annual budget and strategic plan, they have the skills and resources to lead this initiative, and a regular and detailed review of the company’s value will in turn strengthen the budget and the strategic plan.

The best way to measure value creation is to produce an assessment once a year. Most CFOs have some experience with traditional valuations. These are usually prepared for specific situations, such as redeeming an investor or borrowing funds. The key to traditional appraisals is that the work must be accepted by both parties for whom the appraisal is prepared. This requires using an unbiased third-party appraiser.

Charles Slack

However, traditional assessments are expensive, time-consuming and complicated. Most midsize businesses avoid them unless absolutely necessary. We believe this is a mistake. The risk of not knowing your worth is far too great and can have unintended consequences. Working with hundreds of such companies over the years, Phillips has seen too many that have invested resources in declining industries, failed to exploit new opportunities, or accepted too quickly. a lower buyout offer, all because they had no idea of ​​their true worth. when they needed it most.

We’ve created an assessment tool that allows a company’s internal teams to perform regular assessments on their own, without the expense and distraction of a third-party assessor. Our methodology, QuickValue, involves careful identification and evaluation of the eight to 12 value factors that best define your business. In our next article, we’ll dive deeper into value drivers and outline the process by which you can arrive at your company’s value driver score (Hint: It’s not just about what you do well; an assessment successful and useful also means being objective and honest about the vital areas where your business is struggling).

Once you know your value driver score, the next step is to determine your multiple ranges. Your team will look at the EBITDA or revenue multiples of 15 public companies in your industry that are most similar to your business (we’ll explain why in our article on multiples). Then you determine the range in which your value falls and, if necessary, make adjustments for private company mergers and acquisitions transactions.

With your value driver score and range of multiples decided, you are ready to focus on your value. Here is a hypothetical example.

Company X has a value driver score of 30% (out of 100%). It’s low, with plenty of room for improvement. Company X has determined that its EBITDA range is between 10x and 20x. When the value driver score is applied to this range, the EBITDA multiple was determined to be 13x, as shown below.

Knowing that their EBITDA is $20 million, simply multiply that amount by 13x. Company X is worth $260 million.

With an assessment in hand, as CFO (and CVO), you now have critical information needed for future decision making. You have established a baseline against which to compare next year’s valuation and measure your value creation efforts.

Reed Phillips is CEO of midsize M&A firm Oaklins DeSilva & Phillips, and Charles Slack is a business and finance writer. They are the co-authors of the book QuickValue: Discover Your Value and Empower Your Business in Three Easy Steps.

This is the first article in a five-part series on how CFOs can lead an internal team to determine the value of their business. The next articles in this five-part series include:

  • Part 2: Do you have a good understanding of your company’s value drivers?
  • Part 3: Find the multiples that best express the value of your business
  • Part 4: Unleash new value for your business
  • Part 5: Put value at the center of your strategic planning

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