May 2021 Volume 3

OPERATIONS & MANAGEMENT

Strategic Value and the Four Pillars By Joel Strom

In the February 2021 issue of FIA Magazine, I introduced the concept from my recent book “CEO to CVO; Moving Your Company from Ordinary to Extraordinary” (Released by Jones Media Publishing in February and available on Amazon) that the most important job of a CEO is to maximize enterprise value. As I discussed in that article, CEOs should think of themselves as CVOs or Chief Value Officers. I also said that the best way to build great value is by building a great company. I am going to continue on that theme in this issue by delving deeper into a concept I introduced in that issue and that is core to my book, Strategic Value. Actually, Strategic Value is more than a concept, it is a tool that you can use in your quest to create a great, or better yet an extraordinary company with extraordinary value. Company Value Comes from Much More Than Just Today’s Profit I shared a story with a happy ending and a family becoming very wealthy in the February issue. Well, here’s another story. It goes down a different path, but it also has a very happy ending. This one stars a guy named Ted. I knew Ted from college. He was a brilliant engineer and had started his company, Faraday Industries (name changed to protect privacy), right after graduation. They designed and built highly complex products for various industries. He and I lost touch over the years as he grew his company and I grew my consulting practice. Then his attorney reconnected us. Ted’s company had grown, but not to the extent it could’ve, and like most growing businesses it had gone through some rough patches. Once we reconnected, Ted wanted me to help him on some specific projects. As I got to know his company, I wasn’t surprised to see how innovative his products were. I also identified some major infrastructure issues and support gaps that were negatively affecting his Strategic Value. “Yeah, yeah,” he would tell me as I pushed him to address those issues, “we will get to them, but I’ve important product and customer priorities right now.” Then one daymy phone rang. It was Ted. He was calling to tell me that he was approached by a group that was interested in buying Faraday Industries. The number they had initially thrown out to him was $25 million. Ted, although not actively pursuing a sale, had thought about selling and this was just too good to pass up. He made the decision to go forward with them. Then the buyers began their due diligence process. Once that was completed, we met them in Ted’s conference room.We knewtherewere some StrategicValue issues that hadn’t been addressed, so we expected some deductions from the $25 million initial offer. Ted’s shock came when the potential buyer didn’t just lower the offer, they said “no deal.” They had identified many of the same Strategic Value issues we had identified, but they found one that killed the deal. That one was Ted’s role and importance in the business. They considered it too risky to purchase a company

where the past and the future success was so dependent on just one person, Ted. So, Faraday’s $25 million market value dropped to zero on that day. Once the buyers left the meeting and the shock wore off, Ted looked at me and said he was ready. He was ready to commit to doing whatever was necessary to build Strategic Value. He set his Strategic Value vision to sell the company in five years for $25,000,000. We jumped in and finished the assessment of his current situation, paying particular attention to what was detracting from his Strategic Value. Then we created a Strategic Value-acceleration plan and began our journey toward his vision. Every part of the company was involved in the process. We upgraded everything from management to administration; we improved systems and processes and adjusted the organizational structure. However, the biggest change was at the top. Ted agreed to replace himself with a CEO from outside the company. Ted thenmoved into a chief technology role and board chair. Ted was motivated and committed. We spent three years making good progress on creating the “new and improved” Faraday, focused on his five-year Strategic Value vision. Then I got another call from him. “Joel,” he said, “I need to break that promise I made to not consider selling until we had completed our five-year Strategic Value acceleration plan.” He had been approached by another interested buyer, and Ted told them Faraday wasn’t for sale. The buyer’s response was, “everything is for sale, just name your price.” Ted ended up selling his company. He sold it for nearly three times the lost $25 million offer. He went from a lost opportunity to receiving $70 million in just three and a half years. He had increased Faraday’s Strategic Value to become a true “Gotta Have” business. A business that this buyer was willing to pay an unheard of multiple of EBITDA to acquire. So, What Creates Strategic Value? When I tell stories like these, with such happy endings, I then hear, “I want a happy ending like that for my story, how do I get there?” My answer is by maximizing your company’s Strategic Value. Of course, the next question is, “How do I do that?” I shared stories of two very successful companies. We all know of some really great companies and we all know some that are mediocre at best. What is the difference? Take a buyer’s perspective. Why would you buy or not buy those companies? Now be honest, would you buy your company? Better yet, ask yourself if you would pay a premium for your company? If your answer is no, then you know you need to work on your Strategic Value. So, what is Strategic Value? It’s what would make you answer, “Yes, I would definitely pay a premium for my company.” Unfortunately, you can’t flip a switch or make a couple of adjustments to create Strategic Value. It’s not complicated, but it’s not just one thing. It’s a

FIA MAGAZINE | MAY 2021 45