Building Enterprise Value With Strategic Planning
When building enterprise value for your business, a good strategic plan is critical.
Enterprise value (EV) is a financial metric representing the entire value of a company after taking into account both holders of debt and of equity. Building enterprise value translates into a higher price for your business at the time of sale.
When looking to increase enterprise value before you sell, there are a number of directions a business can take. Here are some potential options to focus on: management team, cleaning up financial statements, competitive advantage, internal processes, revenue certainty, and of course strategic planning.
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Why Focus on Strategic Planning
So with all of these proven directions to improve enterprise value, why prioritize strategic planning?
Low hanging fruit – a strategic plan can be completed and begun to be implemented in three months, sometimes less.
Relatively low resource commitment - An experienced planner can focus on creating and implementing the plan. They can tap into the expertise of key management in the company while still allowing management to focus on the current business.
A strategic plan can be transformational – a good plan can be worth its weight in gold, allowing companies to set and achieve objectives that will increase value and attractiveness to buyers.
Actioning the plan will improve financial returns – this ensures that even if a transaction does not take place when planned, shareholders remain happy as the company's financial outlook improves.
Buyers love to see strategic plans when considering the purchase of a business - it details key information they are looking for in one document: market potential, core competencies, financials, competitors, sales forecasts, etc., making it easier to do due diligence on current state and see future direction and potential.
A strategic plan can identify and prioritize what increases profitability and enterprise value at the same time, so your business is focused on generating value for current and prospective shareholders.
What Makes a Good Strategic Plan?
Of course, a good strategic plan must deliver the results your business needs. But what are the must-haves to increase the likelihood the plan will succeed?
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A Customized Plan
No plan is the same as another. I have completed over one hundred plans and I can’t think of two that were even remotely the same. That is because businesses are unique, so a plan needs to be unique – one of the biggest differences to take into account is your people: ownership, management and employee situations. Embrace your successes that are the result of your uniqueness and build it into the plan.
Key Stakeholders are Represented
Bring management together from all your major departments so they help create the plan – key stakeholders that need to represented in the room – sales, finance, marketing, operations, IT, human resources, and perhaps there are other functions that are critical to the success of your business – they need to be at the table too. Bringing this cross functional group together as the “planning team” provides a number of benefits:
- The plan will be a comprehensive view of the business as all stakeholders have a voice.
- Wide knowledge base – key individuals in your organization may collectively bring tens or even hundreds of years of experience to the exercise.
- Buy-in to the plan will be stronger. When stakeholders have had the chance to give input, they are more likely to take ownership and accept the direction the plan will take the company. As a result, managers should be willing to make sure the plan is actioned.
- Stakeholders understand context – especially if there is a major shift or a new strategy, because they were at the table and were part of the enabling discussion. When stakeholders understand the context and foundational elements of the plan they are able to execute the plan right away.
Careful Critical Analysis
Analysis is critical to a successful strategic plan. A company cannot have a successful plan if it bases strategies on what it already knows and has always done. Let me explain this important point:
Presumably, even without a written plan, your managers are currently making decisions that they believe to be right, based on what they and the organization believe it knows. So a plan with no new news would simply be based on the organization's current “collective consciousness”. This results in a plan that had everyone on the same page heading in the same direction before the plan was even created. What it if that direction was heading your business off a cliff? Even worse, what if you did not even know the cliff was there?
Don’t worry, you are not alone – I have never seen an organization that is in a position to begin planning without going through an analysis phase. In fact, I have done planning for multi-billion dollar companies that spent millions on research and collection of data, and even they were not in a good position before an analysis phase was completed. This ensured their research and data made sense to managers, with key learnings summarized and usable for strategic planning. Analysis should focus on internal and external factors. Internal analysis such as your company’s current sales segment should be able to be done relatively quickly. External analysis is usually a heavier lift, as this may require gathering data from clients or end users. It's a major undertaking but I have always seen this pay off in the form of a better, more informed planning team and resulting plan.
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Using the "Tenth Man Rule"
There are many terms for someone, often an outsider, who will hold the natural herd mentality of any group to account. The concept is this: cohesive groups, groups that have already worked together or had the same or similar experiences are preconditioned to think the same way.
The result is a group of people that even with contrary data facing them, may choose to continue to pursue a direction that they have always taken. This is common in business. Typically the best approach to overcome this is bringing in a senior third party planner that is not beholden to anyone in the room and can see the analysis findings and the lack of fit with current direction for what it is. This person must have the ability to bring this to the attention of the planning team so they can see value in potentially changing course.
Remember Action is Critical
If there is no action plan with a senior individual holding those responsible for each action item to account, then the best strategic plan will never achieve the intended objectives. Your work is not done after sign-off of a strategic plan, that's when the good work is just getting started. The strategic plans’ actions are where the rubber hits the road, and where good companies become great.
Strategic Planning is not an event, it is a process. Current strategic plans should impact future versions. Also, completed plans, after a year of execution, are a measurement of what the plan got right and what was well executed. A good plan has on-going data collection and an annual gathering of stakeholders/planning team to evolve or “tear-down and rebuild” the previous years’ plan.
There are many ways to increase enterprise value before the sale, strategic planning should be one of your first considerations. A good plan that follows these must-haves has a good likelihood of succeeding by changing the trajectory of your business and increasing the sale price.
Learn more about Incentica Advisory Group here: https://incentica.ca/
Written by Stephen Williams
Steve Williams CExP™, CMAA, is Partner and founder of Incentica Advisory Group that focus on helping business owners grow and take advantage of M&A opportunities.
Steve is a Certified Exit Planner (CExP™) and Certified Merger & Acquisition Advisor (CMAA) with almost 30 years of senior management and executive experience with some of the biggest and best companies in North America.