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One of the factors that differentiates CKS from the rest of the pack is our focus on Strategic Value. We have proven that by building Strategic Value business owners can increase the market value of their business at the time of a transaction. In addition a company with high Strategic Value can also create more income prior to the transaction and provide owners with more transition options. This article if the first of a series to that will share our thoughts, philosophies, and success stories.

The Strategic Value of a company is dependent on more than simply the company’s profitability and cash flow. Many other Value Creation factors affect the ultimate price a buyer would be willing to pay for a company. We have grouped these Value Creation factors within Four Categories:

  • Financial
  • Strategic
  • Operational
  • “The Market” (where the market is defined as the market for businesses such as yours not the market for your products).

In all four categories there are universal factors that typically will build or reduce value in nearly all businesses for any type of buyer. There are also industry and buyer specific factors that could affect business value. It is equally important to address factors that would decrease value or cause a potential buyer to discount the purchase price.

An example of a universal factor within the financial category that would likely create value in any business would be consistently increasing revenue and profitability. In other words, any buyer would like to see an upward trend in revenue and profits.  Examples of universal factors that would likely cause buyers to decrease their perception of the value of a business would be the lack of audited financial statements in the financial category and customer concentration in the strategic category.

In addition to the universal factors as illustrated, there are value creation or reduction factors that are specific to an industry or a type of buyer.  For example efficiency in the FDA approval process may be an important operational value factor to the buyer of a medical device company but would have no relevance to a buyer of another type of company.

An example of a buyer specific factor for a financial (private equity) buyer could be the strength of the management team. The financial buyer would likely need to rely on that team to grow the business after the purchase while that might not be as important to a strategic buyer. To a strategic buyer in your industry who is looking to expand their market share the strength of the management team would not be as important as the strength of the brand in a particular industry niche or geography.

For a list of possible value creation factors within the four categories and a tool to assess how your company scores in the various Strategic Value factors simply email jstrom@cksadvisors.com. We will also provide you a worksheet to help you identify the potential buyers for your company and the Strategic Value factors that would be most important to each of those types of buyers.

This post published April, 2014 by Joel Strom, Managing Director, CKS Advisors, LLC – jstrom@cksadvisors.com