Dan Reiter, CFP®, CPA, CExP, CVGA
In Value Driver Series #2: Planning and Core Purpose and Values, we describe the importance of having core values and a core purpose serving as the engine for your company culture. Both values and purpose provide direction, designate acceptable company behaviors, and create organizational clarity. In total, these things serve as the foundation for a company reaching its full value potential.
Companies that are excellent at defining why they exist (their core purpose) and how they operate (their values) have a strong foundation. However, a company cannot achieve traction until it develops a plan to tie the “why” and “how” to the opportunities that exist in the marketplace.
This article discusses how addressing a business’s strengths, weaknesses, opportunities, and threats maximizes business value. At its core, business value is created by intentionally focusing on producing transferable, sustainable, and predictable cash flows. From a buyer’s perspective, transferability, sustainability, and predictability are outcomes of painting a clear picture of how a company differentiates itself and will proactively capture future opportunity in its market.
The first step for business owners is to identify the dangers and opportunities that exist in the marketplace and the company’s core strengths and weaknesses. The most common tool for this step is the SWOT analysis. SWOT stands for Strengths, Weaknesses, Opportunities, and Threats.
It is critical to note that identification is not the only step, just the first step. Many companies run awry in this exercise by simply identifying and discussing the SWOT factors and not creating a plan to specifically address them. More on that later.
Putting together a SWOT analysis will provide the full picture of the business and the environment it operates in. The analysis includes both an internal (strengths and weaknesses) and external (opportunities and threats) review.
To start, your leadership team should create a grid with four quadrants—one for each component of the analysis. Then you will go through each quadrant and brainstorm items that may fall into each category.
For strengths and weaknesses, consider the following common internal factors (examples in parentheses):
Financial resources (access to capital, investment opportunities)
Physical resources (state and age of facilities and equipment, location)
Operational processes (documentation and repeatability of core processes, software systems)
Human resources (employees, reliance on owners or other key employees)
Intangible resources (patents, copyrights)
For dangers and opportunities, consider the following common external factors:
Demographics
Economic trends and market cycle
Michael Porter’s Five Forces Framework[1]:
Threat of new entrants
Threat of substitute products
Bargaining power of suppliers
Bargaining power of customers
Rivalry among existing firms
Once you have identified the strengths, weaknesses, opportunities, and threats inside and outside your organization, the crucial next step is to determine how to use this information to position your company for maximum value.
Let’s say your business heavily depends on you as the owner, a few key contracts or relationships, one product idea, and so on. Many available buyers will likely require heavy discounts to compensate for the higher degree of risk. For example:
On paper, Companies A and B look identical. If they follow standard industry “rules of thumb” multiples driven by revenue or EBITDA, their owners will think they have identical values. However, all companies are not created equal! Savvy buyers will significantly discount the value of Company A to compensate for the risks. Or, worse, a market for buyers of Company A may not exist at all!
Company A can address these risks by creating a plan to implement a structured management team independent of the owner and a sales, marketing, and operations strategy to diversify its client base. Both actions, often identified by our financial planning firm’s Value Opportunity Profile™ process, will add significant enterprise value with no changes to either revenue or EBITDA![2]
Let’s consider an example of risk factors external to the business:
Once more, Companies A and B will drive significantly different values to savvy buyers. Company A is at high risk of becoming commoditized in the marketplace—a death trap for many companies. Company A can address its value deficit by either evaluating its existing products/services to identify new markets with higher barriers and growth potential or considering new differentiated offerings in its existing client base.
The essence of strategy is often choosing what not to do.[3] Do you say “no” 20 times more than you say “yes” to the increasing number of opportunities coming your way?[4] Dave Packard, co-founder of computer company Hewlett-Packard, famously said that “more organizations die of indigestion than starvation.”
Identifying how you plan to engage with your customers and what market positioning strategy you are pursuing will help buyers understand how you avoid the ever-increasing pressures of commoditization. For example, one strategic framework on engaging customers, the value disciplines model, is based upon the premise that best-in-class businesses succeed by narrowing their business focus instead of broadening it.
Is your goal to be a quality leader in your product or service? A low-cost provider? Identifying how you will engage your customers and what your market position will be can help a potential buyer clarify the potential return for their investment. However, aimlessly pursuing multiple strategies at once will result in an inefficient allocation of resources, more risk, and reduced future benefits to a buyer.
Discuss your situation with a financial advisor with experience in working with business owners. Schedule a 30-minute discovery call today.
[1] Porter, Michael E. Competitive Strategy: Techniques for Analyzing Industries and Competitors. Simon & Schuster. 1985.
[2] Value Opportunity Profile™ by Corporate Value Metrics.
[3] Porter, Michael E. What is Strategy? Harvard Business Review. December 1996.
[4] Harnish, Verne. Scaling Up: How a Few Companies Make it.. and Why the Rest Don’t. ForbesBooks. 2014.