Value creation is an integrated approach to optimising shareholder value. Value creation is based on developing and applying value drivers (sometimes called ‘value builders’) that help articulate commercial development and also support higher transaction values. By not drawing on the experience of best practices successfully applied by other businesses, founders can risk leaving money on the table. Corporate buyers or venture investors will have considerable experience across previous transactions and so can have a head start on founders of developing businesses. In addition, corporate buyers and venture investors will have a number of options in high growth sectors to deploy their capital so being competitive in terms of articulating value drivers and useful reference points for them can be critical.
More specifically, communicating value drivers to early stage investors (e.g. angels) can promote follow-on investment and make available data to later stage investors (e.g. venture capital and private equity) that the business is ready to take the next step forward and has applied appropriate standards. Management teams at trade buyers will have a range of fears and concerns and will be reassured that they are not buying someone else’s problem: confirmation from the existing commercial leadership team that the investment (or acquisition) will provide an expected return can be far more compelling in practice than external due diligence reports or legal clauses. If you have challenges, better to identify them and provide mitigation beforehand than be surprised by due diligence on your business.
For example, the scope of a value creation programme may include (not an exhaustive list):
- Financial and operational KPI that are aligned with the business model;
- Sales development playbook and measurements, both qualitative and quantitative;
- Employee engagement (including recruitment, retention and cultural development);
- Market insight, competitive analysis, transaction comparables, marketing assets and customer feedback;
- IT and process development and reporting;
- Risk management and ESG;
- Data protection; and
- Leadership.
We help clients develop their value creation drivers by applying our experience in executive, non-executive and advisory roles to ensure their specific context defines the development path. Sometimes clients are responding to a preemptive approach and need accelerated support and other times more gradual development in anticipation of a future event, such as an exit and fund raise. When applied effectively, the above supports operational development which is not surprising given that our approach partly draws on turning around distressed businesses as well as buying businesses.
Common pitfalls in developing a value creation plan are to not have an integrated approach to apply to the specific circumstances of the business and to fail to apply relevant context, such as:
- The industry: value creation drivers will vary by sector segments, for example; engagement and reach will be key in advertising, marketing and digital publishing; MRR in SAAS; sales efficiency in retail and distribution; production efficiency in manufacturing;
- Purpose of fundraising: preparing a business an exit by the founder if very different compared to venture fundraising;
- Stage of business: going to market too early for investment can give rise to onerous equity dilution and equally preparing for startup angel investment is very different compared to seeking private equity investment;
- Alternative funding options: many investors will expect management team to have optimised non-equity fundraising as it will indicate effective working capital management; and
- Tax planning: preparing to take advantage of tax reliefs such as SEIS, EIS (see our article here), ‘entrepreneurs relief’ (now called BADR) or planning tax affairs for the buyer or seller effectively.
Based on factors like the above, specific buyer expectations and fears can be addressed and opportunities positioned to maximise value. For example, securing post deal interim transitional services or demonstrating an absence of interdependencies from the current buyer can be a deal breaker.
HOW WE CAN HELP: We support clients with an integrated, flexible and structured approach, applying both commercial experience and professional expertise. Our recent transactions have included exits, acquisitions and fundraising, with journeys from seed via private equity to assisting publicly listed companies. If you want to know more about how we can help you, get in touch for a free and confidential consultation on hello@linkstoneadvisory.com
