What are Value Drivers and why are they so important to your business? Value Drivers are the various characteristics of a business that buy-out experts believe drive increasing business value. They are willing to pay top dollar for businesses with identified value drivers. Therefore, it is vital for you to know what these value drivers are if you want to transition ownership of your business on your terms.
Recently we met with Bob Timmons, the owner of Timmons Machine, Inc. (TMI), a machine shop. He wanted out. We suspected that his severe case of “early onset burnout” was due to the departure of his management team nine six months earlier. These key employees left the company and set up a competing machine shop funded by backed by the many TMI customers they took with them.
TMI was a wreck – it had no value because its owner had ignored the most important Value Driver – key employees. Timmons should have considered a variety of methods to keep these key employees.
We’ve discussed the importance of establishing your Transition Objectives and determining the value of your business. Now we must create the additional business value and cash flow necessary to help achieve your financial objectives. The elements used to both reduce risk and improve return are commonly referred to as “Value Drivers.”
Value Drivers come in two varieties: generic (common to all industries) and industry specific.
Generic Value Drivers:
A stable and motivated management team;
- A solid, diversified customer base;
- Strong and improving cash flow
- Operating systems that improve sustainability of cash flows;
- Effective financial controls;
- Operating profit margins at least as good as industry average; and
- A realistic growth strategy;
Unique Value Drivers
Your industry also has specific or unique Value Drivers. For example, if you have a distribution company, a purchaser would look at the number of inventory turns per year; the strength of the manufacturers you represent and the level of technical expertise your sales force possesses.
For TMI, a number of Value Driver tools and techniques could have been used to motivate and keep key people. These tools included:
- Stock option, purchase or bonus plans subject to forfeiture if the key employees left prematurely;
- A rich benefit package;
- Non-qualified deferred compensation plans – with vesting – to encourage key employees to stay; or
- A defined succession plan, which included the key employees.
All of these tools can be designed not only to motivate and keep your top people, but to reward them based on their efforts and success in driving business value upward.