Cracking the Value Creation Code: Key Considerations for the Value Creation Process

This article is part of a comprehensive series exploring value creation in anticipation of a downstream transaction and as a foundational business strategy. You can download the complete guide here.

Just like preparing a home for sale, certain improvements can be accomplished in a shorter rather than longer time frame. With more time and investment, more impactful changes can be made to drive value and return on investment.

The Impact of Timing on Value Creation

But what if a business wants to sell now? Or sell in 6 months? Would they have time for value creation to be impactful? There is indeed an interplay between timing and value creation. Certain value creation activities, such as entering a new market or fully productizing a revenue stream, are harder to accomplish in a compressed time frame. And, while market timing is impossible to gauge, some owners want to pursue a monetization event sooner rather than later. What does the value enhancement process look like in those circumstances?

Even on compressed timelines, value creation is beneficial. The activities in this process would concentrate most on items which can result in limiting the amount of potential buyer discount. Examples of this may include the elimination of unprofitable revenue streams, key employee identification and lockups, receipt of all assignments for IP, preparation of assumption-based annual budget and forecast, etc.

In addition, there is still value in longer-term value creation activities that owners will not have the time to implement before the sale. Organizations can incorporate these activities into the Confidential Information Memorandum (“CIM”), providing the buyer with a roadmap for how additional targeted investment can translate to tangible increased value over time. This can help the buyer develop a strong deal thesis and an upside scenario, which often translates to an increased purchase price.

Industry Specific Considerations

While certain value drivers cut across industries (solid management team, good and impactful data, recurring revenue streams, strong repeatable processes, etc.), others are industry specific. For instance, value creation in the federal government contracting space may include emphasizing prime versus subcontractor work, full and open versus set-aside work, establishing a competitive indirect cost rate structure, creating a dedicated business development and proposal team, and building a strong backlog and pipeline. Understanding industry-specific value creation activities is critical and should be incorporated into the assessment process

DIY vs. Third-Party

While some companies may attempt the value creation process on their own, the effort is typically fraught with pitfalls. Because the key to value creation is being able to impartially evaluate the business through the lens of a buyer, leveraging subject matter experts and others who have seen multiple businesses, are familiar with the sale process, and have a clear understanding of best practices for a particular industry helps set the table for success.

Further, the time commitment can be significant. Working on value creation while still driving the business can be difficult. Lastly, the value creation process can result in some hard decisions, including restructuring or eliminating certain positions. While owners may recognize the need to make those tough decisions, they still may find third-party validation and ownership of such actions desirable.

Consulting costs incurred during the assessment and value creation process are add-backs to EBITDA in the calculation of Enterprise Value. Thus, the cost associated with the value creation exercise has no negative impact on Enterprise Value.

In summary, it’s critical to examine these key considerations as part of the overall value creation process.  Value creation serves as a solid foundation to achieve a vision, create, and enhance growth opportunities and drive improved decision-making and financial results. It results in a better run and more valuable business, helping maximize dollars realized upon exit.

Related Articles

• Cracking the Value Creation Code: Laying the Foundation
• Cracking the Value Creation Code: Implementing the Value Creation Process

About Schneider Downs M&A and Transaction Advisory Services

The Schneider Downs Transaction Advisory Services and Corporate Finance Teams provide the strategy, guidance and services organizations need to create value through all stages of a transaction, including due diligence and quality of earnings, mergers and acquisitions, exit and succession planning, capital raising and corporate finance.

Visit our dedicated M&A and Transaction Advisory Services page or contact the team directly at [email protected]. 

Schneider Downs Corporate Finance, LP is a registered broker/dealer. Member FINRA/SIPC.