Achieving Your Multiple

10 key drivers to boost enterprise value prior to a funding round or liquidity event

As the economy continues to undergo marked progress in housing, job creation, manufacturing, and consumer confidence, a solid appetite for investment by private equity investors is flourishing, prompting many business owners to consider a capital raise or liquidity event. What are the key drivers to boosting enterprise value and how can business owners maximize it?

Business owners – whether or not they are contemplating a liquidity event or capital raise – should assess the various components that impact business value and proactively implement the key strategies that bear the most significant potential for increasing enterprise value. Clearly, investors – and businesses alike – are concerned with EBITDA (earnings before interest, taxes, depreciation, and amortization) as it forms the basis for valuation and an initial offer. However, a more fundamental approach to boosting enterprise value is when business owners can “think like a buyer.” Thinking like a buyer includes understanding the key financial and non-financial drivers from a buyer’s perspective and executing specific measures that address those drivers within the organization’s overall business strategy and daily operating procedures.

Assessing Key Value Drivers/Risk Factors

Specific value drivers increase or diminish the strategic or transferable value of a company. Although the importance of each value driver is highly dependent upon the buyer – and different buyers will place different levels of importance on each value driver – some assumptions can be made regarding strategies that are typically employed by various buyer groups.

  • Improving cash flow serves as a foundation for boosting value. Actionable measures for enhancing cash flow include:
  • Identifying areas of operational inefficiency such as logistics, warehousing, and supply chain
  • Reducing customer payment terms and evaluating customer profitability and pricing
  • Understanding product level profitability and determining the appropriate and most profitable product mix
  •  Improving inventory purchases and material resource planning systems
  • Extending vendor payment terms and asking for better pricing and payments discounts

EBITDA has a prominent impact on valuation. Some of the most frequently recurring issues impacting EBITDA include:

  • The reversal of accruals and reserves that were built up in prior periods
  • Changes in accounting policies
  • Non-business expenses/income
  • Differences between year-end versus month-end closing
  • “One-hit wonders” which result in profitability anomalies requiring identification and explanation to a potential buyer

Maximizing Enterprise Value – Think Ahead, Act Now

How can business owners prompt higher valuations? And how can they ensure that they are sufficiently prepared for a liquidity event? They can implement specific strategies to prepare and position their business for a liquidity event as favorable market conditions arise – and they should do so well in advance of the transaction. Furthermore, the following strategies are all considered best business practices that should be executed on an ongoing basis in the ordinary course of business.

“Thinking like a buyer includes understanding the key financial and non-financial drivers from a buyer’s perspective and executing specific measures that address those drivers within the organization’s overall business strategy and daily operating procedures.”

Ten Strategies for Preparing for a Liquidity Event

  1. Build differentiators. Identify items that differentiate your business from your competition. Create your product or service strategy and craft that message to a potential buyer to illustrate how your business is different.
  2. Develop a mission and core set of operating principles. Be able to convey a clear purpose of your business to act as a roadmap in planning for future goals.
  3. Start succession planning early. Regardless of the stage of your business, succession planning should always be top of mind, and the ability to easily transition the company should always be present.
  4. Build a strong infrastructure. Infrastructure includes the people, processes, and technology that comprise a company; it is the foundation on which the business is built. A strong infrastructure will make certain the business operates efficiently regardless of potential changes in staffing and supports successful succession planning.
  5. Build a brand. Develop a brand that delivers on the customer’s want or need and is distinct from the competition.
  6.  Build recurring revenue. Establish predictability of revenue by creating a long-term relationship with your customer base, leveraging all available products and services to customers in order to retain their loyalty.
  7. Build protectable intellectual property (IP).  From a brand name to a patented technology, identify the items that will differentiate the business and provide value.
  8. Build deep customer relationships. Examine how to cultivate an existing relationship and continue the revenue stream. Broaden the customer relationship by leveraging additional products/services to penetrate as deeply as possible, thus becoming more “sticky.”
  9. Retain “top notch” independent advisors. Rely on the right outside experts to assist in the process of maximizing value and preparing for a liquidity event. Key experts to obtain include legal counsel, accounting experts, and investment bankers.
  10. Assess economic, industry, and market conditions. What are the market conditions for your business? Are those market conditions in favor of raising capital or selling the business? The right advisers will be able to provide counsel in this area and offer guidance on the right buyers and/or investors and identify the right time to move forward with a transaction.

Overall, there is a variety of strategies that can be executed to boost enterprise value and thereby immensely benefit owners and shareholders. However, while some strategies in this article have been identified, boosting enterprise value requires extensive planning, expertise, resources, and focused attention. The value of a business is the sum of its advantages and challenges. Increasing and propelling the advantages forward and addressing the challenges in order to minimize risk and failure is the measuring stick of successfully boosting the value of a business.

With market timing being critical, being prepared when it cycles in your favor is paramount. It is never too early to begin preparing for a liquidity transaction and proactively start implementing strategies that can yield the highest valuation at exit.

By considering the above strategies as best practices to be executed as a routine course of doing business and understanding the perspective of the buyer by assessing key value drivers, companies can more effectively position themselves to realize higher valuations when the right market conditions arise for a liquidity event.