Tuesday, September 30, 2014
Buyouts Magazine published an Article of Interest by John M. Collard, turnaround specialist, interim executive CEO, outside director, and private equity investor advisor. Buyouts is published by Venture Economics, a Thomson Financial Company covering management buyouts, leveraged acquisitions, and special situations, for the Business and Investing Community.
www.StrategicMgtPartners.com/buyoutsvaluecreationmodel.pdf Formatted Version
Value Creation Model
Build Enterprises Future Buyers Want To Invest In
By John M. Collard
Value Creation = Net Asset Value + Future Revenue Stream + Going Concern Value + Incentive to Purchase
Valuing a company is the easy part; creating that value in the first place so you have something to measure is a more formidable task. Create a Value Equation to build Worth into a company.
Buyers and sellers look at the component make-up of a company differently, and therefore, place different values on these ingredients and on the whole. To enhance real company value, analyze company components as they relate to worth in the mind of potential buyers.
Typically, strategic buyers of closely held companies purchase at six to 10 times earnings and/or cash flow, while annuity buyers pay two to six times cash flow. The ultimate worth of the company depends upon who the buyer will be. These multiples are usually considerably higher in public companies, but the concepts of building value are the same.
From the start, plan to sell the business and put value creation into perspective. Free cash flow and the continued ability to produce it with reliable probability creates the greatest value.
Value Creation = Net Asset Value + Future Revenue Stream + Going Concern Value + Incentive to Purchase
Net Asset Value (NAV)
Sometimes called Orderly Liquidation Value, it is the cash net worth of assets less encumbrances if you were to liquidate these assets at a fair market price under orderly disposition conditions when liquidation is not necessary. This NAV can equal Net Worth on the Balance Sheet, but is often adjusted for value of intangibles.
Tangible assets can be appraised to establish their worth. Conversely, intangible assets are harder to value because they are subject to interpretation. Intellectual property is also hard to value, but filing more patents will generate value, particularly to those who can afford to protect them from infringement.
The real opportunity lies not in building asset base, but in building maximum return on that deployed capital. If assets sit idle, they are actually losing value, but if volume causes assets to work to produce output production, value is being created.
The closer the relationship of assets to realize $1 for each $1 dollar on the balance sheet the better. Cash and Securities fit this description. Accounts Receivable will be discounted as they age; focus on keeping the days outstanding low. Utilize percentage completion contracts when possible to keep receivables low and cash flowing.
Utilize just-in-time and consignment agreements to keep raw materials at low levels and minimize obsolescence. Produce in-process work expediently to cover shortterm needs. Build finished goods for firm orders or reasonable short-term expectations of sale, don't overproduce. Cover the risk with orders for goods. Seasonable businesses should cover production levels over the off-season with contracts for sale of goods just before the season. It may be better to have less than market demand if projections were off, compared to interest and carrying costs to hold artificial Christmas trees until next year.
Customer Lists, contacts, name recognition, trademarks, reputation, Web distribution channels and Internet presence are often not considered in asset valuation because they are not carried on the balance sheet. These assets, however, are often worth considerable value in the market place. These assets can be turned into cash; therefore, should equal the related value they could generate in return for their sale. These intangible assets can produce future sales, profits, and cash.
Future Revenue Stream
Real value in any company starts with its revenue stream; the more you can count on it occurring, the more value it has. The value becomes the net present value of the after tax free cash flow stream of revenue under contract, plus repeat customer base. Contract backlog is worth much more than revenue that you must locate every year. The cost to recreate the sale each year is high in terms of time and human energy. Locate customers where multiple year contract environments can be set up.
Clearly growth in revenue volume is an indicator of valuation in a company that investors are willing to pay for. If customers flock at above industry levels to a company for the services that they provide, this is a good indication of the company's ability to perform at above expected levels. A motivated sales force with the ability to generate new revenues year after year has more value than a company who has a poor selling reputation. A lack of growth indicates that the company does not have an abi lity to increase its value over time.
When a company has a believable prospectus for the future, the buyer will often plan additional capital investment to fuel growth. The buyer could be motivated to pay a higher valuation for the company and then invest on top of it.
Going Concern Value (GCV)
Here is where the fun begins in all transactions. The going concern value and goodwill, or soft assets, will always draw the most controversy and discussion in terms of their valuation. These elements are most prone to differing interpretation by buyer and seller.
Here to is where you can build the most value into a company. Buyers and investors look more to the company's ability to create additional value to enhance returns on invested capital as they hold their investment. Impart the elements that Future Buyers look for:
Businesses that create value. Consistency is the key. You must demonstrate growth in revenue, profit, and cash flow.
High probability of future cash flows. A history of positive cash flow at increasing levels is very important.
Management team and human capital. Attract and motivate a marketing oriented management team with the ability to produce recurring profits, return on capital, and free cash flow as an annuity for the owners.
The ability to sell, compete, distribute, produce, develop products and thrive. This stand-alone entity track record demonstrates the viability of the market relationship between the products/services offered to meet customer demand and need, ability of the company to compete, and company reputation in the marketplace. Remember, products do have a life cycle and require improvements to remain in demand.
Leadership's role must be to build Going Concern Value. The GCV can be best maximized with stable leadership, setting and following sound strategies to consistently bring products and services to market, all the while nurturing resources and implementing processes to manage the company. Perhaps the greatest value resides here.
Build on any one element in the Equation and you increase its individual value. Build up all elements in the Equation and you realize an exponential creation of value to the right buyer. The buyer looking for a standalone entity to produce an annuity stream will place the highest value on the company when all components are strong and it operates with little owner intervention. Buyers looking only for parts of a business to augment their own, will want to invest less and only place value on some components, regardless of how strong they are.
Remember, as in Field of Dreams ... "Build It, they will come."
About the Author:
John M. Collard is a Certified Turnaround Professional (CTP), and a Certified International Turnaround Manager (CITM), who brings over 35 years senior operating leadership, $85M+ asset and investment recovery, 45+ transactions worth $1.2B, and $80M fund management expertise to run troubled companies, serve on boards, advise company boards, litigators, institutional and private equity investors, and raise capital. John has parachuted in as the Interim CEO or senior executive to turn around troubled entities, and serves as an outside director. John is Chairman of Strategic Management Partners, Inc. (410-263-9100, www.StrategicMgtPartners.com ) in Annapolis, Maryland. John is inducted into the Turnaround Management, Restructuring, and Distressed Investing Industry Hall Of Fame. John is Past Chairman of the Turnaround Management Association (TMA), Chairman of the Association of Interim Executives (AIE), and a Senior Fellow of the Turnaround Management Society. John is a Prince George's Business Leader of the Year. John was honored by the Association of Interim Managers with their Interim Management Lifetime Achievement Award. John was named Most Admired CEO in Maryland by the Daily Record.
About the Firm:
Strategic Management Partners, Inc. (www.StrategicMgtPartners.com 410-263-9100) is a turnaround management firm specializing in interim management and executive CEO leadership, asset and investment recovery, corporate renewal governance, board and private equity advisory, raising capital, and investing in and rebuilding underperforming distressed troubled companies. SMP rebuilds small business and mid-cap firms. SMP helps clients restore value to troubled companies, prepare entities for 'cash out' at maximum value, recover assets for fund investors, support litigation, and invest private equity into distressed opportunities. The firm has been advisor to Presidents Bush (41 & 43), Clinton, Reagan, and Yeltsin, World Bank, EBRD, Company Boards, and Equity Capital Investors on leadership, governance, rebuilding troubled companies, investment recovery, turnaround management and equity investing. SMP is celebrating 25 years of service to its clients. SMP was named Maryland's Small Business of the Year, and received the Governor's Citation, Governor Martin J. O'Malley, The State of Maryland as a special tribute to honor work in the areas of turning around troubled companies and saving jobs in Maryland. Turnarounds & Workouts Magazine has twice named SMP among the 'Top Outstanding Turnaround Management Firms'. American and Baltimore Business Journals named SMP among the Most Active Turnaround Management and Consulting Firms in Baltimore, Washington, and the Mid-Atlantic Region. Global M&A Network Turnaround Atlas Awards named SMP as Boutique Turnaround Consulting Firm of the Year. SMP is winner of Corporate Intl Magazine Global Award for Interim Management Specialist Firm of the Year. SMP is recipient of the Turnaround Management Firm of the Year by Acquisition Intl Magazine.
Strategic Management Partners, Inc.: turnaround managers ready to run troubled companies, recover assets from investments gone bad, advise boards of directors and investors on company viability in distressed situations. We provide strong interim and operational leadership, strategic planning, financial, defense conversion, sales and marketing acumen developed building organizations in large and small companies, including President of public & private middle-market companies providing solutions to Commercial, Federal Government, International markets. Enterprises range from start-up to $100+mil. Industry expertise: Manufacturing; Job Shop; Engineering Services; Computer Processing/Services/Software/Integration; Communications; Defense Electronics; Aerospace; Federal Government Contracting; Systems Integration; High-Tech; Finance; Marine Services; Real Estate Development; Construction; Fabrication; and Printing. Small and Mid-Sized businesses.
When in doubt, call a turnaround professional.
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See formatted version of Value Creation Model article at: Value Creation Model. Build Enterprises Future Buyers Want To Invest In Published by Buyouts, a Thomson Financial Company
Steering Clear of the Brink. Early Signs Pinpoint Business Troubles Published by Journal of Private Equity
Outside Directors Offer Valuable Guidance, Contacts Published by Baltimore Business Journal
Is Your Company in Trouble? Published by Corporate Board Magazine
Managing Turnarounds in Times of Crisis Published by NACD Directorship Magazine
Managing Turnarounds Phases and Actions Published by RMA Journal
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John M. Collard on LinkedIn at http://www.linkedin.com/in/JohnMCollard
John M. Collard on Facebook at http://www.facebook.com/JohnMCollard
John M. Collard on Twitter at http://twitter.com/JohnCollard
www.StrategicMgtPartners.com Turnaround Management Experts
John M. Collard
Strategic Management Partners, Inc.