Why a value creation strategy is an investment in your long-term success
Why a value creation strategy is an investment in your long-term success
While investing in a value creation strategy might not net immediate returns, it is an essential part of securing the long-term future of your business. Start by asking yourself what factors drive and inhibit the value of your business and then take the steps to:
- Play to your strengths
- Pursue sustainable revenue
- Invest in your employees
- Eliminate technology or infrastructure debt
Each of these factors will enhance the performance of your business, increase its valuation to potential investors or buyers, and help secure your long-term success in the industry.
Your company’s revenue and subsequent enterprise value may have increased significantly during the pandemic — but now you’re feeling the pressure of rampant inflation and high interest rates. You may be wondering how to preserve the value of your previously profitable and well-capitalized business as challenging economic headwinds impact your bottom line.
It’s tempting to focus on just your profit and loss statement and cash flow as the cost of doing business increases across all industries. However, your organization is worth more than just its profit and loss statement. Your valuation also includes your enterprise value — or the investments you have made to secure your company’s long-term future.
For example, imagine an online retailer. The company invests a portion of its revenue into developing new products such as a cloud services platform and a video streaming service. While the money spent on the research and development of these new products may not result in immediate profits, the investment will pay off in the long term as more customers subscribe to these services.
Investing in your long-term growth can both drive the value of your business forward and secure your future in the industry. While many leaders are reluctant to invest a portion of hard-earned revenue into initiatives that don’t have an immediate pay off, it’s your responsibility to steer your business towards long-term success.
Why a value creation strategy matters
For many privately held businesses, investing in the long term is sometimes difficult to do. Your goal is to maximize profits. Diverting a portion of your revenue may seem like a big risk with no guarantee of success — especially in today’s uncertain economy.
However, taking the steps to grow your enterprise value is essential to secure the long-term future of your business. As a business owner, you need to be willing to make calculated bets. Investing in a value creation strategy does not just enable you to pursue income — it empowers you to identify your value growth drivers, eliminate value inhibitors, and make the necessary investments to develop long-term, sustainable wealth.
Get clarity on today’s most pressing issues
What factors impact enterprise value?
The first step toward developing a value creation strategy is to evaluate your company’s position in the marketplace today. Start by asking yourself these two questions:
What drives the value of my company?
Many factors — both tangible and intangible — contribute to your company’s overall value. Enterprise value not only considers your profitability, but also many immaterial assets such as company goodwill, your investments in research and development, and a diverse customer base to calculate the true worth of your business.
Imagine a company in the technology sector. It makes $150 million per year and invests $25 million in the research and development of new products. It offers a subscription service which generates repeatable monthly profits and has a diverse customer base — reducing the risk of revenue loss. Additionally, the company has received industry recognition for its workplace culture and simplified its processes to make the business easy to run.
All these factors drive the enterprise value of this company upward. Evaluate your business to identify your value drivers — and then ask yourself what steps you can take to nurture and amplify these moving forward.
What inhibits the value of my company?
Likewise, there are several factors that may inhibit the value of your company. These often increase the risk in your business and can limit your enterprise value growth in the future — even though you may be making more immediate short-term profits.
Imagine another company in the technology sector. The company makes an annual profit of $150 million with no investments into research and development for new products. Its services are a one-time purchase, and it relies on one high-paying customer for most of its revenue. Additionally, its employees work longer hours, and the business processes are complex — resulting in less efficient time management.
While the company might be more profitable than the company in our first example, it is not sustainable. Prioritizing short-term revenue over long-term gains through customer concentration, a lack of investment in research and development, and/or inefficient processes all inhibit the long-term growth of your organization and make it less appealing to potential investors or buyers.
How to enhance the enterprise value of your business
Now that you have asked yourself the necessary questions to further your understanding of the value drivers and inhibitors within your business, it’s time to take the steps to develop a value creation strategy to invest in your long-term future.
Every business is different. There’s no one-size-fits-all solution to grow your enterprise value. While your value creation strategy will be unique, these are several areas to consider as you work towards achieving future success:
Play to your strengths
You and your leadership team must keep your vision focused on the future. Ask yourself what you are building and why you are building it. This demonstrates that your company is invested in itself, understands its long-term capabilities, and is searching for new opportunities to remain competitive in your industry.
Determine what unique value your company offers to its customers and take the necessary steps to ensure your value drivers are sustainable in the future. This may include the development of new products, improving your internal processes to enhance company culture, or investing in new technology to make running your business more efficient.
Pursue sustainable revenue
Take the steps to ensure consistent, sustainable revenue. Consider diversifying your customer base to reduce the risk of customer concentration (i.e., relying on only a few high-paying clients for most of your profits). A diverse customer base ensures that you won’t experience a significant loss in profits if one of your clients cancels their services.
Additionally, evaluate your current profitability model to determine any adjustments you can make to secure sustainable income. For example, if the service you currently offer is a one-time purchase, consider if it is feasible to develop an additional subscription service or another type of offering to ensure your business receives repeatable, predictable revenue each month.
Invest in your employees
Your employees play a key role in the success of your business. Invest in training programs to ensure you have experienced, skilled employees who are familiar with its processes. Additionally, review your operational procedures to see if there are any adjustments you can make to simplify day-to-day tasks to save time and make your business easier to run. Each of these steps will enhance the performance of your business and increase its valuation to potential buyers.
Reviewing your operations will also help you identify any processes where key person risk exists. Key person risk is when only one person knows how to run an essential process or has permission to sign off on important tasks such as payments. Invest in training to ensure you have more than one person who can complete essential tasks so that your business won’t grind to a halt if they’re unexpectedly absent.
Eliminate technology or infrastructure debt
Proactively monitor your technology and physical infrastructure and make changes to support your future growth. Updating your technology as more effective systems come on the market and before existing systems become obsolete can increase your company’s efficiency and productivity.
Explore new avenues to increase performance such as automation or an industry-specific enterprise resource planning (ERP) platform. Prioritize investments that will help you streamline the day-to-day processes of your business, perform essential tasks such as customer management, and support your future success.
Take the next steps towards long-term success
Taking the steps to develop a value creation strategy will play a key role in your organization’s success and help you chart your course forward through turbulent economic headwinds.
Many assets contribute to the valuation of your organization — both tangible and intangible. Investing in a value creation strategy can help identify your strengths, reduce risks, and help secure your long-term future within the industry.
Contact us
To learn more, contact:
Yohaan Thommy, PMP, LSSBB, CMC, Partner
[email protected]
905.247.3254
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