Value Creation Program

The Importance of Value Creation

Overview

Many directors (and other business owners) focus on increasing profits and returns on capital they have invested but pay little, if any, attention to factors that increase the value multiple of their companies. This can be a significant lost opportunity and can jeopardize the prospects of their business – as it may need to pay more for any equity capital it raises and may not be able to raise as much capital (debt and equity) than it would otherwise have been able to raise.

Whereas some handsomely profitable businesses have no market value, some sell on low multiples while others on high multiples, and that can occur in the same sector. Furthermore, some similarly profitable businesses in the same sector can command very different value multiples. So, it is incumbent on the directors in the performance of their fiduciary duties to understand why that is the case, and what can be done to increase the value and value multiple of their company.

Our value creation program is designed to assist directors (and other business owners) increase their company’s profits, value and value multiple and to that end deepen their understanding of their company’s business and its value equation.

Improving decision-making

Overview

A company’s success depends on the decisions of its board of directors, which has an enormous responsibility. The shareholders who the directors represent as well as the company’s employees, suppliers, customers and other stakeholders are relying on them to make the right decisions. Just one poor decision by the board can be catastrophic for the company and its stakeholders.

This is especially critical given our current precarious economic situation, with soaring national debt, policies echoing the main drivers of past financial crises, geopolitical conflict, and some economists predicting double-digit inflation. Surviving the inevitable financial and economic turmoil will require an astute board making prudent decisions.

Our comprehensive value creation program will assist directors (and other business owners) make the right decisions, the decisions needed to increase the company’s profits, value and value multiple and increase the likelihood of it not only surviving the inevitable economic crisis but coming out stronger.

A candid assessment

Given that directors will face a plethora of decisions over the duration of their appointment, how likely is it that you and your fellow directors will make wise decisions?

Is there sufficient diversity of thought? Does each director have a thorough understanding of your company’s business and its target market, good insight into human behaviour, and educated foresight?

While it may not be necessary for each director to be an expert on every subject matter, each needs to have sufficient foundational knowledge to challenge the orthodox view, prosecute counterarguments, intelligently interrogate management’s proposition and challenge recommendations by professional service firms.  A lack thereof increases the likelihood of poor decisions being made and potentially undermines management’s confidence in the board.

What’s needed

Company boards should be comprised of broad mix of people, each of whom is obsessed with improving their knowledge of how best to manage businesses, improving their ability to foresee problems and opportunities, and improving their decisioning capability. Board members should also know the ‘recipe’ for thriving through economic turmoil, know what causes financial crises and have an educated opinion of our medium to long-term economic outlook.  This should not be taken lightly.

How we can help

Our comprehensive value creation program increases the prospects of a board and individual directors making the right decisions. Many boards of top listed companies tap similar knowledge sources as do their competitors, increasing the likelihood of making similar decisions and arriving at similar outcomes. Our program, which could offer different perspectives, could give you and through your decisions your company, a competitive advantage.

The question to ask

The question for a board of directors and each member thereof should not be whether to enrol in the program, but why you shouldn’t. In that regard consider whether the potential benefit far outweighs the cost.

What Happens After You Click “Continue”

After clicking the “Continue” button you will be asked to complete a short form. We seek this information to get a better understanding of our target market. This should enable us to improve the quality the services we offer that market. After completing the form, you will move to a page listing the modules we are offering.

One can subscribe to the whole program or subscribe per module. To assist one make this decision, Rogers Morris has provided a list of the modules, a short explanation of each and a list of questions that may help in assessing how beneficial the module could be for the person or party concerned.

Rogers Morris also suggests you get an indication of the value of your business and the consequential value multiple (Value / EBIT) the market would apply to your business. Then calculate the additional value you would get if the program were to assist you increase your business’ value multiple by 50% from say 2 to 3 times, or from 4 to 6 times. Then compare that difference in value against the cost of the program. Sure, there is no guarantee the program will create that value for you.

Many business owners are either satisfied that their company is generating a return at or above market or have resigned themselves to accepting that, for whatever reason, their company is generating a sub-standard return on capital. They generally believe that they know their business well, that it is operating efficiently and effectively, and that it is maximising shareholder value. But is it?

Let’s take an example from the world of competitive sailing. “Anthony” has been sailing for over 50 years, has owned and skippered keelboats for over 20 years, and has raced his current boat (a 40’ performance cruiser) for over 10 years. His regular crew are also well-experienced competitive sailors. There is no doubt they know how to sail the boat, but are they sailing more efficiently and effectively than the other boats? Are they close to optimising the performance of their boat? They probably believe so because, over the years, they have collected lots of trophies. But are they? Since they race against boats of different makes and models, they compete under handicap systems. Anthony would say his boat doesn’t rate well on the IRC (International Rating Certificate) system, so he only considers his boat’s PHS (performance handicap) result. The problem with this (PHS) measurement is that you can have the worst boat, the worst crew and be the worst skipper and still win.  So, although Anthony and his team are all well-experienced sailors and have performed well on the measurements they consider, they may be sailing well below the boat’s capability and not know it. The same applies to businesses.

Many managers of SMEs and divisions within top-tier listed companies say that they are ‘happy with the performance of their business’, thereby implying that they are not interested in exploring opportunities to improve performance.  If you were a shareholder of such a company, would that approach sit comfortably with you? Probably not! Shareholders prefer management to continually explore opportunities to increase shareholder value. Many once-dominant companies have fallen because their leadership was too complacent or too arrogant to consider business opportunities or notice developments within their market. Even minor improvements can lead to substantial gains. For example, in the world of sailing, the top performers recognise that a mere extra yard of speed on a leg can give them an inside overlap rounding a buoy, which translates into a 2 to 3 boat-length lead on the next leg. A small change to the rig set-up can enable a boat to sail a couple of degrees higher, which can also put a boat 2 to 3 boat lengths ahead. As a result, the top-performing sailors continually look for ways to improve performance. They recognize that small changes can bring about large improvements in performance. The same applies to top-performing management teams.

Let’s take another example from the world of competitive sailing. In this case, the one-design Etchells class, where the boat size, shape, weight, and other dimensions are the same as are the sails’ sizes and shapes. Both professional and well-experienced amateur sailors, skippers and crew are regular participants. They can all do the job and unlike most other sports, participants can compete at the top level without being blessed with some or other superior physical attribute. So why is it that some boats consistently finish regattas in the top quartile, some in the last quartile, and so on? As with the business world, some go through the motions to get things done, and others are arrogant, thinking that because they have been sailing for so long, they know everything. The top performers, including the legends of the sailing world, constantly measure (the right metrics), monitor, refine, systemize, and risk manage. They also establish and refine policies and procedures, set goals and strategies, and continually look to see what others are doing, whether any new technology has been developed, and so on. If a top-performing boat gets passed on the course, the skipper and crew want to know how the other boat did it, what they did differently. They find out, then make changes to ensure they don’t get passed again. The management teams of top-performing businesses do the same.
Our modules show controlling shareholders how their business can become a top-quartile performer and how management can significantly increase profits, return on capital, and shareholder value. We do this by covering a wide range of relevant topics.

Many of the modules cover topics relevant to increasing profits. However, it is unlikely, but not out of the realm of possibility, that any will result in an immediate and material increase in profits. It is more likely that the business will enjoy increasing profits over an extended timeframe. Therefore, starting the process sooner rather than later is essential.

Some modules are more specific to increasing shareholder value, increasing the value of the ownership interest in the company, without necessarily increasing profits. This raises the question – When should you attend to these aspects of your business? The short answer is – NOW.  While you may have no intention to sell your business for many years, it is prudent to know the value of your business and to ensure that it is attractive to the party (or class of buyer) who would see the most value in it, and to b be willing to consider offers that are well above the value to you of your business. You wouldn’t want to miss a once in a lifetime opportunity to sell your business for a lot more than it is worth to you. If you plan to retire or sell your business, you should start the program a decade before you wish to exit the business – before you stop working in or on your business. Buyers of SMEs generally include in the purchase price an earn-out over 2 to 3 years. It generally takes about 18 months from the time you decide to sell to the sale being finalized, about 2 years to adequately prepare the business for sale, prospective buyers will want to review the financial statements over the past 3 years, and you should allocate about 18 months to work through the program. To get the best price you should ensure the financial statement show your business performing optimally at that stage of its life.

Having spent about a decade in the corporate banking arena in the late 1990s, early 2000s, Mark (the founder of Rogers Morris) discovered that the unlisted market offered a plethora of opportunities for significant investment outperformance as compared to larger listed companies. He also recognised that the SME market offered opportunities for significant value creation. Some were undervalued due to being seen to be dependent on the owner or being seen as amateurishly managed. These companies present easy opportunities for significant value creation. A mere size increase also creates shareholder value in the SME market. For example, two similar businesses targeting different geographical markets, each valued at 4 times EBIT multiples, could together be valued at a 6-times multiple. In this case, by merely aggregating the businesses, one increases the value of both by 50%. Further significant value creation comes from having a larger, more professionally run business: These businesses are more likely to secure debt funding without the owner/s having to provide personal guarantees. This significantly reduces the amount of capital the owner has at risk, thereby significantly increasing the return on capital exposed.  For example: In the case of a company valued on a 6-times EBIT multiple, if 50% of the business’ value is funded by a loan (without shareholder guarantees) at 5% interest, the value of the owner’s investment increases by 70%.

Since realising that the SME market offers opportunities for significant shareholder value creation, Mark spent most of the past two decades focusing buying or investing in companies within this target market. During that time, he analysed many companies from both the buy- and sell-sides. This experience improved his knowledge of this segment of the market and of the prospective investors and gave him further insight into the opportunities for shareholder value creation.  It also led him to realise that the owners of many of the SME businesses on the market get a much lower price than they could otherwise have got, had they also focussed on increasing the value of their businesses. This included businesses having a track record of generating annual profits of well into 7-figures but having no value to an acquirer.

Rather than just focusing on the buy-side, Mark has decided to help the owners of SMEs significantly increase the value of their ownership interests in their businesses.  Hence, our offering the advisory modules.

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