Unlocking Client Value Unleashing Firm Growth€¦ · Methodically, Measurably, Maximizing Business Value with the confidence of a proven, repeatable, process EBITDA Multiple Ranges

Methodically, Measurably, Maximizing Business Value with the confidence of a proven, repeatable, process

Unlocking Client Value Unleashing Firm Growth

The Opportunity for Value Growth Services

Ken Sanginario, Founder CPA/ABV, CVA, CGMA, CM&AA, CMAP, CTP, MST, MSF The Value Opportunity Profile Corporate Value Metrics, LLC

Market Differentiation

Value Growth Engagements

Compliance Engagements

Market Potential for Value Growth Services





Satisfaction a transactional measure …

a backward looking indicator of current problems and issues

Loyalty a relationship measure …

a forward looking indicator of future buying behavior


Value Disciplines Model



Bowman’s Strategy Clock


9

New markets for existing products

and services

Diversification of new products and

services in new markets

Deeper penetration of existing market

New products and services in

existing market

Ansoff Matrix

Taking Clients away from

Competition

Acquisitions

Value Growth Services


U. S. Market Segments


Statistics to Remember 250,000 U.S. companies ($5M-

$100M sales) will try to exit by 2030

200,000 will be deemed “not market ready”

20,000 will fail to transact

16,000 will sell with

concessions 14,000 will

sell at desired value

220,000 cos $1 trillion


A Tale of Two Companies

Private Company Relative Values Public Company

1X

3X-5X


Valuation Simplified (Gordon Growth Model)

CF1 _____________

k -g V =


Relative Risk Cost of Capital (RISK)

Public Company vs. Private Company

• Private Co. Cost of Capital = 3X - 5X Public Company • Higher cost of capital = Lower business value • ~ 2/3 of difference in Value = “Company-Specific Risk”


Company Specific Risk

Public Companies are Viewed as Less Risky;

Stronger Management Teams; Greater Transparency;

Better Organizational Structure; More Comprehensive Strategies; Better Systems and Processes;

More effective Market Positioning; Robust Product Development;

Many Other Drivers


Business Road-Mapping

What is Business Road-Mapping?

The periodic assessment of a business enterprise

and development of prioritized initiatives to strengthen the business

prepare it for long-term growth and maximize its sustainable future value

in a measurable manner

- Ken Sanginario, founder and developer of the VOP


The Premise

Most private companies have an opportunity to double their value over a 3 – 5 year period, by adopting a disciplined, methodical, approach to reducing company-specific risk and increasing quality. If we can identify as many risk areas as possible, assess them objectively, and dynamically link our assessments to the calculation of business value, we can use the process to maximize client value through risk reduction.


Price Ranges in the Private Market

1,800+ LMM PEG transactions since 2003 TEV range from $10M - $250M

8 major industry groupings

Measured the range of EBITDA multiples covering 2/3 of all transactions (1 std. dev.)

Across all transactions / all years

Across size ranges / all years Across industries / all years

By year / all industries and sizes Source ofInformation from GF Data® may not be reproduced or used in work product without written permission from GF Data®.


1,891 TransactionsAll Industries 7.7XAll YearsAll Sizes

71%4.5X

EBITDA Multiple Ranges2003 - 2014

Source ofInformation from GF Data® may not be reproduced or used in work product without written permission from GF Data®.


EBITDA Multiple Ranges by Total Enterprise Value

2003 - 2013

751 TransactionsAll Industries 6.9XAll Years

77%3.9X

$10M - $25M TEV568 TransactionsAll Industries 7.7XAll Years

71%4.5X

$25M - $50M TEV



EBITDA Multiple Ranges by Total Enterprise Value

2003 - 2013

404 TransactionsAll Industries 8.2XAll Years

58%5.2X

$50M - $100M TEV168 TransactionsAll Industries 8.8XAll Years

57%5.6X

$100M - $250M TEV



1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

152 98 133 195 230 167 93 203 204 244 147 75

4.2 4.4 4.5 4.6

4.4 4.4 4.2

4.4 4.5 4.6 4.7 4.6

7.4 7.6 7.5 7.6

8.0 7.6 7.6

7.4 7.7 7.8

8.3 8.2 EBITDA

MULTIPLES

number of transactions by year

All Industries

Ranges reflect 1 standard deviation from the mean. 2014 reflects data through 9/22/14. Information from GF Data® may not be reproduced or used in work product without written permission from GF Data®.


A Typical New Client Scenario

You land a great new client …

The owner wants to exit within one year …

He believes that his business is worth $15M …

WHY?


Comparable Companies? Company A Company For Sale Company B 25 Years Old Company Age 25 Years Old

Niche Consumer Product Product Niche Consumer Product $30M Sales $30M $3M EBITDA $3M

Nominal Market Growth Nominal None Product Development Program Robust None Market Development Program Robust

Original and Worn Equipment Condition New, State-of-the-Art Thin and Weak Management Team Deep and Experienced

None Strategic Planning Highly Developed Old, Antiquated Information Systems State-of-the-Art Owner Dictates Corporate Culture Owner Cultivates

Unreliable Financial Reporting Highly Disciplined None Lean Initiatives Fully Implemented

At Risk Environmental Industry Leader Haphazard Training Regular and Formal

Would They Both Have the Same Value?


You determine the business value to be $11.0M …

He needs the $15.0M to support lifestyle …

He’s facing a $4M Value Gap …

How do you advise your client?


Go Grow Your Company and Come Back When You’re

Bigger and More Profitable!

???


Many owners believe that the most effective way to build business value is to:

Grow Sales

Cut Costs

Make Acquisitions

… or some combination of the above


How do they grow sales?

Cut prices? … Is it sustainable? … Will market match?

Chase revenue? … Is it strategic? … profitable? … supportable?

Expand territory? … Can they penetrate? … local nuances?

New products? … Will they succeed? … best investment? Growth can consume capital, strain an organization, damage reputation, increase business risk, and actually erode value

How About …

Execution of a comprehensive written strategic plan?


Where do they cut costs?

Cheaper products? … Will that adversely impact sales?

Reduce G&A? … Employees? … Q.C.? … support?

Pressure supply chain? … They have long memories. Cost reductions can undercut the ability to support long-term growth, hurt a company’s market position, and destroy long-term value.

How About … ?

A cost study to identify and capture efficiencies


Can they successfully make an acquisition?

Can the company absorb it? … Pressure exposes weaknesses.

Can cultures mesh? … Often very difficult.

Can efficiencies be captured? … Most are not captured.

Can customers be retained? … Where are their loyalties? Acquiring another company on top of a weak infrastructure can cause failure to both the acquired company and the core business.

How About … ?

Detailed analysis to determine whether acquisition, joint venture, or reinvestment will create most value


Chasing quantitative results directly can adversely impact the organization.

On the Other Hand: Focusing on the qualitative factors that drive quantitative results can align and strengthen

the organization, improve profitability, enhance growth potential, reduce overall risk,

and maximize value.


Does the contemplated exit channel matter?

Since a company never knows for sure which exit channel will be successful, they should strengthen their company in a manner that will maximize value no matter which channel is ultimately followed.

Overall quality impacts overall value. Deficiencies in any area may be viewed as indicators of overall quality, even if they would not directly impact the operation after a transaction.


Developing Your Own Process

Step #1 – The Assessment

A. Every Company is Comprised of a Series of Interdependent Modules 1. Planning 2. Leadership

3. Sales 4. Marketing

5. People 6. Operations

7. Finance 8. Legal

B. Subdivide Each Module for Easier Assessment and Management Example: A.7. Finance

a. Finance Team b. Finance Strategy c. Financial Planning

d. Analysis & Reporting e. Financial Stability f. Balance Sheet

g. Internal Controls h. Information Systems i. Risk Management


Developing Your Own Process

Step #1 – The Assessment (cont’d.)

C. Develop a Question Set to Assess Each Subcategory

Example: A.7.d. Financial Analysis and Reporting

i. Are the Company’s financial statements audited? ii. Are full financial statements prepared on a monthly basis? iii. Does the Company prepare annual projections? iv. Are the projections reviewed and updated at least quarterly? v. Are the projections supported by detailed written assumptions? vi. Is product line or SKU profitability regularly analyzed? vii. Is inventory regularly evaluated for obsolescence? viii.Does the Company benchmark performance against industry metrics? ix. Does the finance dept. evaluate all new strategic business opportunities?


The Link Linking the Assessment to Value

A. Once questions are developed, create a standardized answer system to objectively score the answers.

B. Just as questions were developed in a balanced manner, the scoring system for each category should also reflect balance.

C. The scoring system will then be used to compare the company before and after improvements are made.

D. Implemented broadly enough, the percentage increase in overall score should approximate the percentage increase in baseline value, without any corresponding increase in sales or profitability.

E. Individual category scores can then be used to estimate the impact of various organizational improvements on overall value.


The Roadmap

Moving to Implementation

A. Develop recommendations to address each of the identified weaknesses.

B. Rank the recommendations in order of priority to be addressed.

C. Provide several “what-if” scenarios to demonstrate the impact of various combinations of recommended initiatives.


Conditions for Success

1. Organizational balance is perhaps the most critical element to establish.

2. Standardized questions should be broad and deep enough in each category to adequately address all potential company-specific risks.

3. Include enough overall questions to allow some assessment error without rendering the result unreliable.

4. Establish the links at the sub-category level to provide transparency as to how each category affects the overall results.

5. The process must be simple, easy to execute, and easy to understand, for the advisor and the company.


Balance is Critical!


Example of Value Sensitivity to CSR (directional example, only)

FCFF (000)--> 500 1,000 1,500 2,000 2,500 3,000 3,500 4,000 4,500 5,000 C 1% 5,615 11,230 16,845 22,460 28,075 33,690 39,305 44,920 50,535 56,150 O 2% 5,270 10,540 15,810 21,080 26,350 31,620 36,890 42,160 47,430 52,700 M 3% 4,965 9,930 14,895 19,860 24,825 29,790 34,755 39,720 44,685 49,650 P 4% 4,694 9,388 14,082 18,776 23,470 28,164 32,858 37,552 42,246 46,940 A 5% 4,450 8,900 13,350 17,800 22,250 26,700 31,150 35,600 40,050 44,500 N 6% 4,090 8,180 12,270 16,360 20,450 24,540 28,630 32,720 36,810 40,900 Y 7% 3,781 7,562 11,343 15,124 18,905 22,686 26,467 30,248 34,029 37,810

8% 3,514 7,028 10,542 14,056 17,570 21,084 24,598 28,112 31,626 35,140 S 9% 3,280 6,560 9,840 13,120 16,400 19,680 22,960 26,240 29,520 32,800 P 10% 3,074 6,148 9,222 12,296 15,370 18,444 21,518 24,592 27,666 30,740 E 11% 2,891 5,782 8,673 11,564 14,455 17,346 20,237 23,128 26,019 28,910 C 12% 2,728 5,456 8,184 10,912 13,640 16,368 19,096 21,824 24,552 27,280 I 13% 2,580 5,160 7,740 10,320 12,900 15,480 18,060 20,640 23,220 25,800 F 14% 2,448 4,896 7,344 9,792 12,240 14,688 17,136 19,584 22,032 24,480 I 15% 2,327 4,654 6,981 9,308 11,635 13,962 16,289 18,616 20,943 23,270 C 16% 2,217 4,434 6,651 8,868 11,085 13,302 15,519 17,736 19,953 22,170

17% 2,116 4,232 6,348 8,464 10,580 12,696 14,812 16,928 19,044 21,160 R 18% 2,023 4,046 6,069 8,092 10,115 12,138 14,161 16,184 18,207 20,230 I 19% 1,937 3,874 5,811 7,748 9,685 11,622 13,559 15,496 17,433 19,370 S 20% 1,858 3,716 5,574 7,432 9,290 11,148 13,006 14,864 16,722 18,580 K 21% 1,785 3,570 5,355 7,140 8,925 10,710 12,495 14,280 16,065 17,850 | 22% 1,716 3,432 5,148 6,864 8,580 10,296 12,012 13,728 15,444 17,160 | 23% 1,653 3,306 4,959 6,612 8,265 9,918 11,571 13,224 14,877 16,530 | 24% 1,593 3,186 4,779 6,372 7,965 9,558 11,151 12,744 14,337 15,930 V 25% 1,537 3,074 4,611 6,148 7,685 9,222 10,759 12,296 13,833 15,370


Common Implementation Opportunities • Strategic planning • Executive coaching • Transition planning • wealth management • Transaction support • Cost and pricing studies • Profitability analyses • Lean initiatives • Incentive plans • Staffing assessments

• Systems evaluations • Project management • Policies and procedures • Insurance reviews • Website development • Strategic alternatives • Cash flow forecasting • Bank negotiations • Capital sourcing • Equity structures


Challenges for Owners and Advisors Owners Need: Education regarding

• Current and potential business value • Impact of qualitative improvements on value • M&A transaction process and market dynamics

Guidance • Disciplined, methodical, consistent, prioritized, approach • Advisors whom they can trust as business experts

Advisors Need: • Education and Awareness • Tools to help facilitate an effective process • Collaborator networks


• Differentiated value proposition • New revenue streams • Deeper client relationships • Higher realization of billing rates • More versatile and loyal employees • Smoother seasonality to services • Increased client referrals • Deeper, longer-term pipeline visibility

Benefits of Providing Value Growth Services



Company Founder Kenneth J. Sanginario

• 30+ years experience providing financial and operational leadership to middle market companies;

• 15 year consulting practice developing and implementing value-maximizing strategies for companies in transition;

• Certifications: CPA / ABV, CVA, CM&AA, CMAP, CTP, MST, MSF

• Frequent speaker and writer for national and regional conferences and publications

• AM&AA instructor on Value Growth and Market Readiness

• Advisory Boards: • MidMarket Alliance (educational chair) • CFO Publishing Corp. • Various private companies

• Board President of Solutions at Work, focused on ending poverty and homelessness


Questions?

Thank You!


Learn more at www.corporatevalue.net.

Ken Sanginario Founder

[email protected]

508-870-5805

mailto:[email protected]

Documents

Unlocking Client Value Unleashing Firm Growth€¦ · Methodically, Measurably, Maximizing Business Value with the confidence of a proven, repeatable, process EBITDA Multiple Ranges