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Value
Creation
Whitepaper.

Chapters (Click to expand)

Maximizing Business
01 Value Prior To Exit

Maximizing Business
Value Prior To Exit
How a Winning Value Creation Strategy Can
Boost Your Valuation

If you’re thinking about exiting your

business, you’ve probably given thought to
valuation. Perhaps you’ve even go"en o#ers
or received a valuation appraisal already and
thought “how can I make my company even
more a"ractive to buyers?”.

The truth is, there’s usually various ways to

be"er position your company during the exit
process, and even optimize and enhance the
value of the business to receive maximum
value. Many founders end up se"ling on an
o#er that could be much higher with a
relatively small investment of both time and
capital.

Investment in a pre-exit
value creation strategy
can pay off
There are parallels to real estate here. Do you
sell your house as-is that perhaps needs
some repairs or could benefit from some
improvements? Or, do you put in the
investment to fix the roof, paint the walls,
and do some quick and easy renovations to
try to get a higher o#er?

In private equity, there are far more issues to

consider, but unlike real estate, the ROI
potential can be much larger and the
risk/reward more asymmetric.

For instance, we have seen upwards of

4000%+ ROI on value creation strategies,
and sometimes within a very short period of
time (less than 7 months of work in one
case).

That said, If you’re not at least exploring your

value creation options as part of your exit
strategy, you may be leaving immense value
on the table.

Sellers have four key things to consider to

achieve maximum exit value:

1) Ensuring your
company is exit ready
Buyers have a long list of criteria that they
look at to determine if a company is a fit and
how to value it. Some of these value drivers
are objective, like revenue concentration and
EBITDA, while others are more subjective.

Ensuring you not only check all the boxes in

the due diligence checklists, but also have a
compelling vision and growth story, are
critical before bringing your company out to
market.

While simply being exit ready is table stakes,

many companies seek buyers prematurely,
but could be much be"er o# in these
negotiations with some focused preparation.

2) Optimizing certain
aspects of the business
can significantly affect
valuation
There’s always room for optimization and
e#iciency gain in any company. Some of
these can be relatively simple interventions–
fix or automate a process, reorganize a
department, optimize messaging, etc.
Others can be a large e#ort and may not
even be obvious from an insider’s
perspective.

Ge"ing a third-party perspective of your

business can help uncover these
optimization opportunities and make it more
a"ractive to potential acquirers. The key is in
determining which optimizations are going
to be the most critical to your valuation.

3) Major opportunities to
drive growth that have
been overlooked or
unvalidated can be
transformative
Going further than optimization, it’s
important to understand the more
transformative strategies and market
opportunities available to drive growth. This
is where there can be the highest potential
impact on valuation.

Here’s some questions to consider that can

help you think about where there might be
opportunities:

1. Is it clear what the company’s growth

strategy and 3-5 year vision is (and is it well
documented)?
2. What are potential growth opportunities
(market expansion, new products, new
channels, etc.) available to the company?
3. What level of validation have you done in
exploring the feasibility of these growth
options? Have you done analysis, talked to
the market, run experiments, etc.?
4. What level of capability does your company
have to execute on the growth
opportunities? What are the gaps?
5. How might the company acquire the
capabilities if it decided to execute?
6. Do you have a clear and documented exit
strategy?

Having the answers to these questions (with

the data to back it up) internally already puts
you ahead of many companies. However, it’s
often hard to see the forest from the trees
when you’re in the weeds everyday. Ge"ing
an outside perspective to help answer these
questions can be invaluable.

4) Building for a specific

acquirer in mind
If you understand what the ideal buyer looks
like and can build or position your company
for them, this is the holy grail of value
creation.

Companies like Marketo weren’t acquired by

Adobe for $4.75 Billion in 2018 because they
had great revenue and EBITDA numbers. It
was because they aligned their company
with the acquirer’s vision and was able to
integrate perfectly with Adobe’s product
suite.

Marketo would not have go"en the above-

market valuation it did if it was valued based
on standard performance metrics. By
understanding your potential acquirers, you
can build strategic value into your company
that can dramatically a#ect valuation.

How to determine the

ROI of a value creation
strategy
The delta between the potential valuation
increase and the investment required to
develop and execute the value creation
strategy is the ROI. This is a factor of both
time and money.

While this might sound straightforward,

identifying the value creation options
available and then prioritizing them is a non-
trivial task that involves a significant
analytical e#ort. However, once you have a
clear understanding of the opportunities
available, you can get a sense for how
executing on any particular opportunity
could impact your valuation.

In subsequent articles, we’ll explore how to

assess your company’s value creation
opportunities and determine the impacts on
valuation in more depth.

What is a Value Creation

02 Strategy?

What is a Value Creation

Strategy?
It is easy to assume that value creation strategies
are the domains of private equity or large
corporations. But what if you could harness what
private equity does for its portfolio companies for
your own business? The truth is anyone can benefit
from a targeted approach to drive value across their
organization.

Whether you’re aiming to exit and enhance the

transferable value of your business, or simply looking
to drive be"er progress in achieving company-wide
goals, a value creation strategy is a powerful tool to
employ in your organization.

Defining value creation

strategy
At its core, a value creation strategy is a systematic
approach a company employs to amplify the overall
value of the business. As a comprehensive, yet
targeted strategic plan, it includes identifying and
implementing ways to improve the business, such as
by increasing revenue, reducing costs, optimizing
operations, and/or making strategic investments.

In the private equity world, where you will hear this

term tossed around frequently, it is the strategy that
is forged post-investment aimed at increasing the
value of the portfolio company over the course of
their hold period, with the aim of selling the asset o#
for a profit in the future.

But don’t be mistaken; founders can, and should,

leverage tried-and-true methodologies to craft
these strategies, too. By zeroing in on initiatives that
bolster company value, founders can enjoy similar
benefits, paving the way for a lucrative exit in the
future.

Comparing company-wide
strategy vs. value creation
strategy
A value creation strategy can sound a lot like the
typical overarching strategy that any company
develops to drive the organization forward. However,
there are distinct di#erences in both timeframe and
scope.

A company-wide strategy is a comprehensive

blueprint outlining the organization’s overall
direction, objectives, vision, mission, and goals. It’s a
perpetual strategic roadmap for your business that
guides the overall direction and objectives.

A value creation strategy, on the other hand, is a

more focused approach that specifically targets
ways to increase business value over the course of a
narrowly defined timeframe (short to mid-term).

Another key di#erence is the scope. A value creation

strategy is specifically focused on creating value for
the business, whereas a company-wide strategy
may have a broader range of goals and objectives
(e.g., enhancing brand reputation, culture, CSR,
etc.).

In many cases, a value creation strategy can be seen

as a component of a broader company-wide
strategy.

For example, a company-wide strategy may identify a

need to increase revenue or optimize operations,
and a value creation strategy may be developed to
specifically address those goals.

This may involve analyzing market trends, identifying

new growth opportunities, assessing operational
performance, and developing strategies to address
any areas of weakness or opportunity.

Ultimately, the scope of a value creation strategy will

depend on the specific needs and goals of the
business. If you’re looking to exit in the near future,
your value creation strategy might be geared
towards identifying the best exit paths and
uncovering the quick wins that will have the greatest
impact on the business prior to a sale.

Thus, depending on the goals, it may involve a

targeted approach to a specific area of the business,
or a more comprehensive plan that considers a range
of factors and initiatives that can impact overall value
creation.

The benefits of developing a

value creation strategy
Developing a value creation strategy will ultimately
help you meet your strategic business goals in a way
that prioritizes initiatives with the highest potential
to maximize your company’s value, ensuring e#icient
allocation of resources and fostering sustainable
growth.

In PE, value creation strategies are developed to

amplify enterprise value in anticipation of a future
exit. However, this isn’t the only use-case. For
founder-led companies, they can be critical to meet
key strategic milestones or objectives (e.g., revenue
or EBITDA goals), especially when significant
transformation is needed in terms of how the
business is operated.

Other benefits include:

1. Enhanced focus on value drivers: The process of

creating a value creation strategy itself can help
identify and prioritize the value drivers and associated
initiatives that can impact value. By concentrating on
these specific initiatives and tactics, resources are
allocated more e#ectively, maximizing returns on
investments.
2. Informed decision-making: Value creation strategies
encourage data-driven decision-making, ensuring
that strategic choices are based on a thorough
analysis of market trends, operational performance,
and growth potential.
3. Increased a!ractiveness to investors: A company
with a clear value creation strategy demonstrates a
commitment to maximizing shareholder value, making
it more appealing to potential investors and
facilitating future fundraising e#orts.
4. Alignment of goals and priorities: It helps align the
objectives of di#erent departments and teams within
the organization, ensuring that everyone is working
towards a common goal in a more granular way than
other org-wide strategies.
5. Greater adaptability and resilience: As with any type
of strategic plan, it encourages businesses to
proactively address challenges and seize
opportunities, making them more adaptable and
resilient in the face of market fluctuations and
uncertainties.

By embracing a value creation strategy, businesses

can unlock their full potential, optimize resource
allocation, and set the stage for long-term success
and growth.

The Drivers of Value

03 Creation

The Drivers of Value Creation

Navigating the endless ocean of strategies and
tactics aimed at driving exit value can be a daunting
task. Executive teams often struggle with identifying
which strategic initiatives should take center stage
over the next 12-24 months.

A common pitfall for executive teams is fixating on

the wrong priorities. Contrary to popular belief, exit
value isn’t about chasing revenue or EBITDA
multiples. Instead, it revolves around creating
'transferable value' by shaping the business in a way
that entices and convinces the ideal buyers, while
withstanding the rigors of due diligence and investor
scrutiny. This positions your company as a sought-
after acquisition target, shifting the dynamic from
actively selling to being pursued by investors and
acquirers.

This is why numerous founders face a rude

awakening when it comes time to exit, only to
discover that their company’s valuation falls far short
of their expectations. In fact, many businesses get
‘discounted’ by a significant amount and it’s usually
tied back to 'transferable value' and exit readiness.

To explain this conundrum, we can break

down the elements of value creation
into 5 core value pillars: Strategy, Talent,
Product, Revenue & Operations.

The evolution of any company revolves around

developing a strategy, hiring talent around that
strategy, creating a product with that talent, driving
revenue from that product, and operating the
business end-to-end.

If you think about these concepts in descending

order of importance, you build a pyramid. Each pillar
has a direct e#ect on another, yet to di#erent
degrees.

For instance, if there is a lack of strategy, all of the

other pillars will likely su#er. On the other hand,
operational ine#iciencies may not have the same
marginal e#ect.

Value Pillar #1 - Strategy

At the top of the pyramid sits Strategy, or strategic
value. Your growth vision for the company falls here.
This includes determining how you best serve
customers, the objectives you must achieve, the
market to compete in, how you will compete against
them.

This is the highest value driver and at the top of our

value pyramid because it establishes the foundation
for all other value drivers in the organization. A well-
defined strategy aligns the company’s resources,
priorities, and goals, creating a clear roadmap for
growth and value creation.

Prioritizing strategic value elements can pay o#

exponentially. This is what buyers pay premiums for
and can have exponential e#ects on valuation.

Examples of holes in strategic value leading to the

company being discounted at exit include:

● Industry and/or competitors are growing faster

than you or there are low barriers to entry. You do not
have a competitive moat.

● Current markets have matured or will mature in

the near future and there is a lack of a growth plan or
vision or expand into new markets.

● Competitive advantages over traditional

competitors are eroding or are dealing with new
competitors, without a cohesive plan on how to deal
with the situation.

● Lack of strategic clarity and alignment or lack of

formal business planning

● Lacking a defined exit strategy

Value Pillar #2: Talent

Talent is the next most important value driver. Talent
includes not only the team itself, but also the
strategies and processes surrounding it and how
well your ‘talent machine’ is positioned to execute
your strategy. Team and leadership value is going to
make up a large portion of your company’s perceived
value to any acquirer.

Examples of issues with the talent pillar leading to

valuation discounts include:

● Objectives of the executive team aren’t aligned

with the objectives of the CEO / board

● Misalignment between the founders, exec team

or board

● Company lacking the right team or skills, a high

team turnover, or lack of operating/leadership
experience.

● Founder/CEO stuck in the day-to-day of the

business, rather than being able to work on the
business.

● Reliance on key personas in the business (e.g.,

what would happen to the business if the
founder/CEO left? Could the business easily replace
them?)

● Issues with employee satisfaction, culture &

endurance

● Lack of formal talent acquisition, retention and