August 2021 Volume 3

OPERATIONS & MANAGEMENT

Why It’s Always the Right Time to Be Accelerating Strategic Value By Joel Strom

In this month’s issue of FIA Magazine, I will continue to use my book “CEO to CVO; Moving Your Company from Ordinary to Extraordinary” (Released by Jones Media Publishing in February and available on Amazon) as the basis for these articles. In the February and May issues, I introduced the concept role of the CVO and of Strategic Value in creating extraordinary companies with extraordinary value. This month I will show why no matter where you are in your business life cycle, it is always the right time to be building Strategic Value. Strategic Value MadeThemRethinkTheir Plan We were approached by a company owned by two partners who wanted to sell their business. It was a very successful but very specialized niche manufacturing company. When we arrived for our first meeting, in their older, somewhat run-down facility, we learned that one partner was in charge of the manufacturing operation while the other handled engineering, planning, inventory management, and administration. They had worked hard and built a nice, thriving business that was unique in its industry. Both partners told us that they were tired and that it was time to sell. Like somany other companies, because of the partners’ hard work and daily involvement, they were making a lot of money but had not built much Strategic Value. They were not a “Gotta Have” at this point. We found better than expected revenue and profits. However, from that initial meeting we had enough information to know that it was unrealistic to think that a buyer would pay the premium they hoped to get for the company. The fact that both owners, who were critical to the day-to-day operations of the business, wanted to leave the business as soon as possible played heavily on our conclusion. We convinced them that it would be better to hold off going to market until they accelerated their Strategic Value. Then the hard part, convincing them to make the changes needed. They had to have a mindset shift about infrastructure investment. In the past they had been focused on current profits rather than building future value. Then, the more difficult change for them, reduce the company’s dependency on the owners. They reluctantly agreed to give it a shot. First, they hired a younger but experienced manager to run operations. Then another strong manager to learn and manage engineering and products. Fast forward one year and we asked if they were ready to go to market. “Why should we sell now?” they both said. “We are working

part-time, our new manager has basically taken over operations and implemented new methodology, systems and processes, Debbie is doing a great job overseeing engineering and products. Even with an increased payroll, efficiency increases have us making more money. We think we are going to hold for a while.” Our client had the ah-ha moment many others have had. You don’t build Strategic Value and create a “Gotta Have” just to sell a business, you do it to create a strong, sustainable, extraordinary company. Four Benefits of Building Strong Strategic Value Now is always the right time to be accelerating Strategic Value. Waiting until right before putting a company on themarket is not the right approach. Strategic Value not about cosmetic improvements to attract buyers. It is about creating companies with real, not cosmetic improvements. Building strong Strategic Value provides companies and owners with these four benefits. 1. Moves the Multiple The first benefit is what most people think of when first introduced to the concept of Strategic Value. It moves the multiple used to calculate the enterprise value of the company. If a company has built its Strategic Value to a level that creates a “Gotta Have” business, the rule of thumb industry multiple gets thrown out and a much higher “Gotta Have” multiple comes into play. Even when a company doesn’t get all the way to “Gotta Have” status, when it is put on the market, all things being equal, it will net a higher sale price. That’s because Strategic Value eliminates the reasons for buyer discounts. The company is in good shape, it is operating as it should for its size, ownership is not critical to its success, it has invested in its future, there is little the buyer can pick on to negotiate a lower sale price. When starting the Strategic Value Acceleration process, owners need to change their perspective from owner to buyer. They need to ask themselves, “Would I buy this business for top dollar? What would I use to argue a price reduction?” Keeping a buyer perspective and regularly asking those questions and acting on them can help in the Strategic Value acceleration process. 2. Improves Operating Results and EBITDA What this really means is that Strategic Value can help you make more money. Within each of the pillars of Strategic Value, the focus is on creating a stronger, more efficient, better operating, recognized company. All of these translate into a smoothly operating organization that can maximize revenue with minimal profit leaks.

FIA MAGAZINE | AUGUST 2021 52