Walking Through Value Acceleration

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Introduction

The Value Acceleration Methodology was first developed by Chris Snider from the Exit Planning Institute in the early 2010s as a solution to commonly seen problems:

  • Owners generally don’t prepare for their exits;
  • Owners have a significant amount of their net worth tied up in their business;
  • Owners generally have a misguided (or nonexistent) sense of the valuation of their business;
  • Many business exits are unplanned due to negative unforeseen circumstances such as a shareholder death or disability; and
  • Many owners have anxiety about their post-transition life that creates pre-exit anxiety and/or post-exit regret.

The implications of this are:

  • Owners are leaving significant amounts of money on the table;
  • A lack of runway to exit means that they don’t have sufficient time to address all the necessary issues including psychological ones ied to the exit itself;
  • This reduces the success rate of transfers;
  • Ultimately, an untransferable business will likely be appriased only at its liquidation values, which will in many cases be substantially less than the valuation of a viable business.

Objective of Value Acceleration

Given these problems, the stated objective of the Value Acceleration Methodology is two-fold:

  1. Help business owners increase the value of the business before they exit;
  2. Help owners successfully transition their business, either through an internal or external exit.

We have spoken before about the Three Legs of the Stool. As a reminder, the Three Legs of the Stool are: i) financial readiness (in other words, will I have enough to retire?), ii) personal readiness (am I comfortable with my exit options? Am I comfortable with my post-exit plans?) and iii) business readiness (is my business ready to transfer?). Like a stool, all three legs must be addressed because when a stool has even one wobbly leg, the stool itself will be unstable, and may even break. Similarly, a holistic exit plan must address all three aspects of readiness, otherwise some aspect of the owner’s ultimate transition will be flawed.

Financial Readiness

Let’s illustrate an example. If an owner’s financial readiness has been inadequately addressed, the owner may transition without knowing if the net proceeds after transition will provide for an adequate retirement nest egg. Assuming the owner’s primary goal after transitioning is some form of retirement, a nest egg that is too small may force the owner to either accept a reduced standard of living in retirement or having to rethink retirement altogether, perhaps having to take on a new job to generate more money.

Personal Readiness

When an owner has not fully addressed personal readiness, one of two things may happen. First, an owner may experience pre-exit anxiety as the prospective exit approaches. This anxiety may be so great that it will result in the intended transaction either being deferred or even cancelled. This will leave the owner in an unfortunate situation because the transition will still not have occurred even though it will have to eventually be carried out at some point. The second potential consequence of not addressing personal readiness is that an owner may experience post-exit regret. This regret may manifest for a number of reasons. One of the primary reasons for such regret may stem from the owner’s identity being intrinsically linked to the business itself. Essentially, the business and the owner are one. And once the business has transitioned, the legacy owner now feels adrift, lacking a dedicated purpose to which their energy can be directed. Post-exit regret may also manifest due to a smaller than anticipated net proceeds after  transition that has arisen thanks to a lack of pre-transaction planning. In addition, a transition to new owners who do not share the legacy owner’s core values may create a lasting unease as the realization creeps in that stakeholders such as employees and the local community may not be well served by the newer owners. Additionally, an internal transition to management or family who are either unwilling or unable to effectively lead the company after transition, may be a source of post-exit regret as the fortunes of the business may decline.

Business Readiness

A business that is “ready” implies it is both transferable and one for which an average—or  preferably an above average—multiple can be obtained. A business that is not ready to sell, will either not find an interested buyer, or may find a buyer but perhaps one who only offer a low multiple for the business. Business readiness is about a Company’s growth prospects, its risk profile, and the value behind its human, structural, customer, and social capital.

Process Not An Event

Value Acceleration is a process not an event. By this we mean that Value Acceleration is a continuous process undertaken by a Company’s management to create value, de-risk the business, along with running the business on a day-to-day basis as though the business could sell or be transitioned at any time. Through embracing this mindset, owners are creating real wealth that can be harvested.

Discovery Phase

A Value Acceleration program starts with a Discovery Phase. This phase is sometimes referred to as ‘The Triggering Event’, in that the very act of beginning the discussion of a holistic exit plan triggers a snowball effect as a business owner educates themselves, improves the business, and ultimately exits the business on their terms, rather than on terms dictated to them. The purpose of the Discovery Phase is to identify all the action items required by the owner to be taken before an exit and then create a prioritized action plan to be followed over the next three to five years (or whatever time frame is most appropriate for a given owner).

The key elements of the Discovery Phase are as follows:

  • A business valuation;
  • A deep-dive into the value drivers of the business.
  • An Enterprise Value Assessment—a look into the existing marketplace along with the potential valuation of the business if a value creation strategy were to be employed.
  • An exit options analysis.
  • A post-transition options analysis.
  • Development of a prioritized action plan.

Once the Discovery Phase is complete, we will have a good idea of:

  • What is the owner’s ideal time frame to exit?
  • What is the current valuation of the business and how does this compare to the potential valuation under a value creation program?
  • What steps are required to improve the value, de-risk the business, and make it more transferable?
  • What are the ideal exit options for the owner? Given this, what key steps would have to be carried out to make this transition as smooth as possible?
  • What does the owner’s life look like post-transition? What steps are required to achieve this?
  • Through speaking with a wealth manager, what is the ideal size of the owner’s nest egg for retirement purposes? How does this correlate with the valuation of the business? Is there a value gap that exists and if so, what steps are needed to address this?

In conclusion, the Discovery Phase tells us:

  1. the state of an owner’s readiness now,
  2. a vision of where the owner wants to be in a given time frame, and
  3. provides a prioritized action plan to make this vision a reality.

Value Acceleration Phase (Implementation)

Once the Discovery Phase is complete, we know what we have to do and when to do it. The next step is to implement value improvements to the Company in a systematic and incremental manner. In other words, we will concentrate on growing the cash flows of the business, expanding the business’ potential exit multiple, and addressing the specific tasks we have identified previously to make the transition smooth.

The “to-do” list we generated in the Discovery Phase may contain dozens of items. Practically, trying to accomplish everything on our list all at once will likely only end in frustration and failure. This is why implementation should be broken down into smaller time frames we call “sprints”. In the Value Acceleration Methodology, sprints are commonly 90 days in length, although slightly shorter or longer time frames may also work just as well. The key is to focus on accomplishing certain pre-defined tasks within that 90-day sprint. It’s not possible to address all tasks at once. Rather, the focus is on making systematic but incremental improvements.

Stephen Covey, in The Seven Habits of Highly Effective People, popularized the concept of tackling “big rocks” to incrementally manage your to-do list. In the case of a business owner, a “big rock” could be anything that serves as a major impediment to that Company’s growth or a successful exit strategy. For example, extreme customer concentration is an issue that can render any company untransferable. By identifying and then tackling the big rocks in growing and exiting a business, an owner can address the real impediments faced by the business, thus clearing the way to address some of the smaller problems.  In a 90-day sprint, an ownership team may set out to tackle one big rock that may have been festering for some time. In addition, management may also decide to cross off some easier to manage “low hanging fruit” from the to-do list.

Value creation and transitioning a business take time, so there likely will have to be several iterations of 90-day sprints to tackle everything we identified in the Discovery Phase. For most Middle Market businesses, Value Acceleration may be a two to five-year process. However, starting this process even earlier provides the owners with more flexibility and a greater number of options. At the end of each 90-day period, management should take time to reflect on what has been accomplished, what problems still remain, and then address the priorities for the next 90-day period. It is important to note that while it is common to plan a year or two into the future, the Value Acceleration process is flexible enough to allow owners the ability to re-shift priorities and address new concerns as they arise.

At some point, after several 90-day iterations, a business owner will have to determine if it is finally time to transition. Whether the transition be internal or external, the appropriate planning steps have been taken and ownership is ready for the next phase. The owner is now much more educated about the transition process including the value of their business, the value creation process, and what the next chapter of their professional and/or personal life entails.

It is also possible that through a Value Acceleration program, an owner may defer the timing of a transition. However, this deferral will not be due to fear of the unknown or unpreparedness, but rather, the owner may have so strongly adopted a value creation mindset, they have now committed to grow their company through acquisitions. Though this journey will have its own unique challenges, it may pay off handsomely in the end.

Team Approach

A value acceleration project inherently must take a team approach because no one person can undertake such a challenging assignment on their own. First, the owners and employees of the company must work as a team to implement the growth and transition strategy from within. After all, advisors can guide, but ultimately it is the team that must take ownership of improving the business. Because every organization is complex, the value creation process needs to fully address the various moving parts of an organization. Most commonly, organizations can be broken down into the following functional areas:

  1. Sales
  2. Marketing
  3. Operations
  4. Finance
  5. IT & Infrastructure
  6. Human Resources
  7. Legal & Regulatory.

On top of this, strategy, planning, and leadership help to glue these functions together to work as one unified machine.

Given this, the types of advisors that may be a part of your transition team include:

  1. Business coaches—Sales, strategic, and leadership coaches are the most common today but there are a myriad of other types who may be able to assist the owner;
  2. Accountants—A good accounting firm can help you structure your organization to take advantage of important tax considerations such as the Lifetime Capital Gains Exemption along with helping you better assess how to structure any transition (for example an asset versus a share sale) to make it tax efficient.
  3. Lawyers—There are a number of lawyers you might consider including on your transition team including a general business lawyer (one who can assist with buy-sell agreements or managing business disputes), intellectual property lawyers (making sure your Company’s IP is protected and transferrable), and an M&A lawyer who can help identify red flags during a company sale or purchase. Also, a good lawyer can help ensure negotiation terms of any transition are fair and reasonable to all parties.
  4. M&A Intermediaries/Brokers—Intermediaries play an important role on the sell side in finding suitable acquirers of the business, along with safely steering the Company through the due diligence process. Find a good intermediary well before any sale and see if their energy and personality matches up well with yours.
  5. Business Valuators—Understanding the business valuation process is critical within a value creation program because you need to understand:
    1. What is the valuation of my business now?
    2. What factors drive that valuation?
    3. How can I improve my valuation over a given time frame?
  6. Fractional Functional Personnel—As the business world increasingly becomes fractionalized, more professionals are selling their services not as full-time personnel but rather as functional professionals. The most common functional professionals can be found in the areas of finance, sales, marketing, operations, IT, and human resources. Fractional professionals allow Middle Market companies to benefit from many years of experience in certain areas while only costing a fraction of what a full-time professional would cost in terms of salary and benefits.
  7. Insurance Professionals—Insurance is important both on a corporate level and the shareholder level. Corporate insurance can help ensure the operations of a business are adequately covered to avoid catastrophic losses while insurance surrounding key employees and shareholders will help to ensure the continuity of the business in the case of an adverse event impacting either a key employee or shareholder.
  8. Wealth Managers/Financial Planners—The wealth advisors in your life have the best knowledge of what you will need to retire comfortably. They may also have addressed any post-retirement concerns such as what will you do after the transition? For example, will you continue on in a consultant capacity or is living the good life at the cottage the primary objective? There is no right or wrong answer, but whatever direction you wish to pursue, it should be considered and adequately planned before exit.

Conclusion

The Value Acceleration Methodology is a process that helps owners focus on the three legs of the stool: financial readiness, business readiness, and personal readiness. Business readiness involves both addressing value creation and exit planning concerns. In short, the Value Acceleration process can be broken down as follows:

  1. Discovery Stage—Determine the key steps necessary to successfully grow and transition the business through creating a prioritized action plan that also includes a business valuation, a deep-dive into the value-drivers of the business, and an overview of the potential range of multiples available in the Company’s market.
  2. Implementation Stage—On an incremental basis, implement the prioritized recommendations through a series of 90-day sprints. Over time, the business grows, becomes less risky, and the owner is more educated about the exit process.
  3. Transaction Stage—Eventually, a decision will be made to transition the business either internally or externally. Because of the work done in previous stages, this stage has a much higher percentage chance of being successful and meeting the owner’s objectives from a holistic perspective.

In short value creation and holistic exit planning should be a part of your everyday business strategy.

 

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