Building Enterprise Value to Create Flexibility for Business Succession
Creating a profitable, healthy business is important for all business owners, whether they have planned for a future business transition or are just starting to think about what a succession plan may look like. Profitable, healthy businesses allow business owners more options and flexibility when it’s time to transition their business so they are in control rather than being forced into a sale due to unexpected circumstances.
In early May 2024, dozens of private manufacturing business owners gathered in CLA offices in Green Bay, Wausau, and Milwaukee, Wisconsin to discuss their personal and business goals, transition objectives, and value creation strategies to build enterprise value within their organizations.
Starting with the end in mind
For privately held business owners, it’s important to understand the “why” behind your purpose for being in business so you can take a holistic view to strategic planning and achieving your business goals. Having a multifaceted approach and looking through various lenses can provide significant value whether you are planning to transition business ownership in the next 3-5 years or if you are 10+ years out. Once a business owner can clarify their business, personal, and financial goals, the next step is determining value and assessing key value drivers across the business.
Value creation
What makes one business command a three times earnings before interest, taxes, depreciation, and amortization (EBITDA) multiple while another business an eight times EBITDA multiple? One dollar of earnings is not created equal across various businesses. The value factors determining value are more than just numbers. Thankfully, these value drivers are generally within the control of the business operators regardless of the market conditions or macro-economic outlook.
The Value Triangle provides insight into areas driving enterprise value for manufacturing businesses in all stages of their business lifecycle. There are four critical engines that are part of the Value Triangle: financial engine, growth engine, leadership engine, and execution engine.
- Financial engine — Consistent financial performance and growth are critical in driving business value. Strong margins showing resiliency with changes in demand provide confidence historical performance will continue. Do earnings turn into cash or more investment?
- Execution engine — Businesses with scalable processes and systems command higher value than businesses lacking in these areas. These processes and systems promoting institutional knowledge throughout the organization rather than individualized knowledge attract a higher number of transition options. Exceptional customer service is also key. This includes quoting acceptable lead times, delivering product on time, and delivering a high-quality product.
- Growth engine — Businesses demonstrating the ability to enter new markets with diversified products and customers are generally more valuable in the marketplace. Businesses with specific capabilities and customer solutions create loyalty and dependency from their customer base.
- Leadership engine — Having a strong leadership team may be the most impactful characteristic of a healthy business. Leaders in key functions within a business outside the ownership group are critical to creating culture and continuity throughout the organization. These leaders can articulate the greater mission and lead the organization to success.
It’s often said by focusing on the leadership, growth, and execution engines, the financial engine results will take care of itself. These three areas are the foundation to creating enterprise value and driving flexibility and optionality so you can transition a business on your own terms.
How we can help
If you need help building your roadmap to creating enterprise value and creating optionality for owner transition and/or succession, let’s talk.
Written by Brady Paschke
Jennifer Clement is an executive sales and marketing leader specializing in value creation for the C-suite. In her current role at CLA, Jennifer collaborates on strategy with executives of global manufacturing and distribution companies to accelerate results. Previously Jennifer served as a Global Business Acceleration Leader for Complete Manufacturing and Distribution (CMD). During her time with CMD, Jennifer lived and worked in Asia from 2015-2019. Prior to CMD, she spent 10 years in senior care technology. Jennifer started her career at Johnson Controls (JCI) and spent nine years in leadership roles; followed by five years at Rockwell Automation (ROK) leading c-suite strategy and marketing operations.