In an ever-changing business environment, when looking for ways to differentiate a company’s products from its competitors, it is often not enough to make a distinction based solely on price.
To compete, and to do so successfully, it is more appropriate to differentiate based on “value added.” The term refers to service, quality, engineering, innovative product design, turnaround time or any other characteristic that gives a company its own identity and assists it in standing apart from the competition. It has also become the difference when it comes to winning over a customer.
Value-added service has become an absolute necessity, and understanding the financial impact to the value of the business will help determine where to focus on those value-added service activities.
Calculating value
Company value is usually not an additive; rather, it is generally the product of some multiple derived from earnings, cash flow or comparison to similar company transactions. It is the “value multiplied,” where little adjustments in operating characteristics and financial results can have a significant impact — both positive and negative — on the value of a business.
Here’s an example of how a slight adjustment can impact a company’s value. A computer-consulting company was considering the sale of its business. It had a long history, a good track record and diversified clients, and had been profitable.
When looking at its value and at drivers of value for this type of company, which at that time were earnings, cash flow and revenue, it was determined that its value could arguably double if each of its employees, approximately 100 of them, worked on and billed two additional hours for attending to client matters each week as opposed to performing administrative tasks. Two more hours — just a reallocation of how time is spent for 5 percent of the employees’ time in a 40-hour week — would double the value of the company.
Plan a value strategy
Often business management is focused on the crisis of the day. That ubiquitous software giant asks in its advertising, “Where do you want to be today?” One should rather ask, “Where do you want to be 10 years from now?” and, more important, “How are you going to make it happen?” Answering these questions will help your company plan its strategy for implementing value-added services.
Through prosperous and challenging times, members of management must be willing to challenge themselves to improve and challenge the status quo. As you look at your company, can you answer the following questions to identify the opportunities and challenges you face?
* How does our company’s profitability compare to our peers within the industry?
* Is the company earning an adequate economic return?
* Are the initiatives and value-added activities within our business plan designed to build value?
* What are the drivers of building value in our company based upon the industries within which we operate (i.e. earnings, customers, revenues, or other matters and/or a combination)?
* Does our company have a documented business/strategy plan?
* Does our company have the capital structure to achieve management’s goals?
* Does each employee know what makes a difference in the company’s success?
* Does the company have a succession plan for key employees in the event of unforeseen matters?
Keeping an eye toward the future and concentrating on the value drivers that make a difference can create opportunities for your company and its employees. Understanding the value drivers and revisiting the company’s results and prior valuations, in comparison to the targets set, will enable management to measure its progress toward its goal and assess whether its strategy and vision are resulting in increased company value. Mark Stepka is a director of SS&G Financial Services Inc. (www.SSandG.com) and provides consulting and valuation services to privately held businesses. Reach him at [email protected] or (330) 668-9696.
