Business value is determined by much more than profits or a collection of assets. These things may serve as reference metrics (multiple of EBITDA, percentage of book value, etc.), but they are just a snapshot at a point in time.
Value, as defined as the ability to realize, monetize, and maximize, is instead determined by four items: decipherability, credibility, growth story, and acceleration.
Decipherability: Show how it works and how the pieces fit together. Unit economics, product mix impacts, customer differentials, fixed vs. variable cost bases. The distillation of performance highlights the key trends leading up to this moment of time, and shows an investor/buyer that the ability is in place to understand and monitor operations, which contributes to….
Credibility: We’re not only the team to lead this business as-is, we’re the team to take it to the next level. Even if further growth represents uncharted waters, management teams can establish credibility by showing cross-functional competency that extends beyond the experience of the CEO/owner (often a product or sales leader). Further, repeatable processes and forward looking capabilities show that the team has done its diligence in preparing the business for its….
Growth Story: Here is where we are heading, with the team and credible plan to convince you the prospective return is worth the risk. Details of sales expansion (e.g. product/service suite, geography), capital requirements to meet production needs and admin infrastructure, inorganic (acquisition) growth potential. Every deal is predicated on a story about the future, and growth stories are the most attractive. This works best when the story is not only defined, but already in motion, as evidenced by….
Acceleration: We are already acting on core pieces of the plan, further proving our credibility and laying out the path to accomplish the growth story. Building pipeline and rationalizing costs go a long way toward mitigating the perceived risk associated with projections showing top-line and bottom-line growth. Even if part of the story cannot yet be acted upon (such as requiring incremental capital associated with investment), laying groundwork shortens the time to act when everybody says GO.
I’m sure there are those who will want to talk cost of capital, maybe even unlevered beta (the horror). You know what REALLY drives down the cost of capital and maxes out beta versus the market? A kick a** team who knows their business in and out, can create trust in their chops to manage growth, can lay out that path to growth, and show active progress. Control what you can control.
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