The following documents were written to reflect AEG member research, experience and expert advice about growing enterprise value and maximizing personal wealth of business owners. They may be freely distributed, with attribution. Contact AEG for more information.
Bridging Your Twin Value Gaps
The failure of business owners to reach their goals is often not due to a lack of effort or desire but lack of clarity around the big picture and a myopic pursuit of short-term goals. Once set upon, there is a natural human tendency to stay on a path or charted course. This white paper summarizes three decades of academic and market research and includes consultations with hundreds of owners of businesses of all sizes. The goal of this paper is to help you:
- Clarify your business and personal goals and determine how your business and personal life connect and coexist;
- Re-assess the time that you spend in business and personal endeavors;
- Gain a clear understanding of the resources you will need to accomplish your goals and how and when to best utilize these resources.
Enterprise Value: The Importance of Operational Excellence Enterprise Value (EV) is widely misunderstood in the private middle marketplace despite being the predominant valuation metric used today. Even professionals (attorneys, CPAs, bankers, etc.) regularly misuse the term. EV analysis incorporates qualitative factors (quality of revenue, management, systems, barriers to entry, size of market, etc.) to value a company because such factors better predict future profitability. Indeed, qualitative factors have become paramount in determining a company’s value relative to its comparable companies. Analysis of these factors across thousands of private middle market companies reveals that Barriers to Entry is a top contributor to value gap and addressing such barriers is the top growth opportunity.
Critical Alignment: Business and Personal Objectives The primary objective of a business is to achieve the owner’s personal goals. Purpose-based lifestyle planning is the foundation of personal planning for owners of middle market companies. Often, an owner’s financial plan will reveal a Personal Value Gap — the difference between assets needed to fund the owner’s financial plan and available assets. Once this is understood, business priorities and options may be developed accordingly. Given the complexity and diversity of personal and company factors, the best way to begin the process is to assemble an advisory team of experts collaborating to achieve your unique combination of personal and business objectives. There’s no such thing as a standard plan or team, but there are processes you need to follow.
Optimize Your Work/Life Balance. Unlike employees, an owner’s day is typically characterized by a lack of freedom. Whether at the office or not, an owner’s mind is pre-occupied with customers, product launch, marketing strategy, HR issues, etc. The fact is, owners are often tethered to their work, which crowds out the development of other aspects of their lives. Although you want to devote whatever is necessary to build your business, the lack of balance and freedom can lead to over dependence on the owner, leading to a decrease in business value to a buyer. More balance can lead to value growth.
Why Is Private Equity Increasingly Interested in Smaller Private Companies? Private equity has increasingly focused on small companies because of their superior return on investment, growing ten-fold in terms of funds raised in the last decade. Private equity helps grow revenue or reduce costs in exchange for a stake in the company. AEG’s model provides these same advisory services from senior advisors without giving up part of your company. You can decide which model is best for you.
Building the Right Advisory Team. Every business owner has a set of advisors that have brought them to where they are. However, continued growth of your business with new technologies and new markets into mew markets may require new thinking from a wider set of experienced specialists. AEG’s model is not to replace your current advisors but to supplement them with skills and perspective from where your business is going or could go. This paper walks you through what to do and not to do to build your future advisory team.
Operational Excellence. Valuation of private businesses is essential to direct growth strategies and for the owner to plan for eventual transition. However, particularly for smaller companies, until now only an expensive and time consuming valuation process could provide this information. Thirty years of experience and extensive research and validation at MIT have made available CoreValue, a fast and accurate assessment tool for private mid-market companies. In hours, AEG Business Advisors can create a valuation that formerly took months, plus develop a strategy of high ROI growth actions.
Quantifying Intangible Value Drivers in Small to Midsize Businesses. Successfully transferring a private business requires proof of enterprise value through a reliable measure of future profitability. Intangible assets often turn out to be the hidden value drivers of SMEs, and crucial to their competitive advantage and future earnings. Yet, conventional financial statements do not adequately identify and measure the intangible value drivers. This paper discusses the importance of quantifying intangible SME value drivers, and lays out a three point way forward for the public and private sectors to address these issues.
Quantifying Value Drivers. Enterprise value measures the “true worth” or “economic value” of a business. To measure the effectiveness of the operations in a private business, these measurement methods are often ad hoc, qualitative, and delivered via consulting practices or advisory services, making them expensive for many SMEs. This white paper outlines a new framework and methodology to quantify transferable enterprise value in SMEs. This methodology provides actionable transparency to the operations of a private business – an often missing yet critical component in financial valuations – to enable companies to improve value, communicate among owners, boards, and management teams, and successfully transfer to new owners.
Measuring Enterprise Value and Operational Excellence. A reliable, continuous and actionable measure of enterprise value requires a generally accepted measure of both financial performance and operational excellence. The lack of a ‘reliable measure’ of enterprise value is caused by an inability to measure “operational excellence” with the same speed and confidence with which “profitability” is measured. This paper lays out a reasonable and market-tested framework to quantify operational excellence and its linkage to enterprise value, then to show that it can act as a generally accepted starting point for valuation. A second purpose is to introduce the “Core Value Rating” as reliable measure of operational excellence.