Driving Value in Your Growth Company

Vol 8, Issue 4

Driving Value in Your Growth Company
There is an assumption among many business owners that growth will automatically increase the value of their business. This can be a misleading assumption. Growth by itself can add to value but growth does not guarantee increased value.

Entrepreneurs have an almost hard-wired desire to grow their businesses. If we assume that entrepreneurs want to increase value along with that growth, we need to understand what factors must be combined with growth to ensure that the business increases in value.

A Simple Guide to Growth-Related Value Drivers

Profitability – It may seem hard to believe that one would need to emphasize that profitability is an essential driver of value, but many owners rationalize their lack of profits by saying something like, “The profits will come later, I’m investing for growth.” This may hold true for a while but if this rationalization becomes chronic without progress towards profitability, then it is just an excuse and a failure to deal with reality – lack of profitability.

Replicable Processes – This is extremely important. Is the work that leads to sales and profits carried on only by oral tradition (or worse, just in the owner’s head) or can the business develop and train new people to do things as they should be done even in the absence of the owner? Are the systems and processes well-documented and executed?

Potential – Where does the future growth come from and can a persuasive and convincing argument be made to support the projection of growth? Volume 9, Issue 1 will be covering this in “Quantifying Your Market – Do You Know Where Your Success Comes From?”

Return on Investment – Does the combination of the three items above lead an outside party to calculate that they will get a good return on investment if they pay for a high valuation of the business?

A Small Food Service Company Turns Growth Into Real Value
Our client was a small chain of six fast food restaurants in a middle-sized metropolitan market. The owners were the founders. They had split off from a third partner who had taken national franchising rights for the concept while our client took the rights to the state they were located in.

The client had come to The Podolny Group because they wanted get out of food service and move into another business venture. We were asked to review the company from the standpoint of their exit options.
In our evaluation of the company, we noted the following:

Profitability – The company was very profitable compared to its peer ratings especially in its prime costs (a food service term for direct labor and direct costs such as food and other disposables).

Replicable Processes – The company had superior management and training systems and processes along with a distinct corporate culture. Most notable, although it was a small company, it had a non-owner general manager who was key to the day-to-day implementation of theses systems and processes. There was ample documentation for the systems and processes.

Potential – A specific and logical growth plan existed that identified the locations the company could expand into that would double it in size. However, after the existing growth plan was executed, the number of logical expansion growth opportunities diminished.

Return on Investment – Projected return on invested capital for the potential new locations was very high compared to industry standards.
Evaluating the Value Potential

Looking at all the factors, we advised the client that their value potential was probably at its maximum already. There was a clear potential to be leveraged under the current circumstances. However, once the company started building out the potential new locations, sales and profits might rise but the potential for still further growth would be less.

The company put itself on the market. Our analysis was verified as a successful sale was consummated for a substantial premium of 6.6 times IBITDA in an all cash transaction.

__________________________

Owners are advised to consistently compare their business goal requirements against their personal goal time frames. Downloading our free book, Make Your Business Serve You©, provides a methodology for conducting such a review.