Mechanisms to optimise business value

This starts with understanding how the core value drivers of your business interact with one another to drive profitability, financial strength, investment returns and business risk. What are the goals, challenges, strengths and risks in each of these areas? Having a complete understanding of what drives the value of your business is critical, as it allows you to then focus on the areas and mechanisms that will most effectively optimise value.

The process of optimising value should be an ongoing one, even if the value itself is only realised at certain strategic points, like an M&A transaction or transition to new management. If your business is not prepared for these situations, it is likely to reduce buyer confidence and purchase price as a result. In contrast, if you prepare the business effectively, you should also be in a position to enhance buyer confidence and attract a premium on top of the value multiple, due to the enhanced financial performance, organisational structure and strategic longevity.

At Mazars, our work with a wide range privately owned businesses across the globe has enabled us to identify several ‘pillars’ that are crucial to business growth. Although the specifics of each will vary from business to business, these six pillars provide a foundational framework for optimising value.

Stakeholder and management mindset

One of the first things to think about is what value means to owners, stakeholders and management. Value can cover a broad range of business characteristics, from financial performance and level of debt to market sentiment or the quality of assets. If your objective is to increase profits for example, value optimisation mechanisms might include performing a spend analysis to check if the cost structure is wrong or whether it is a revenue issue.

But remember that value is more than delivering short-term profit. It's about longer-term growth in the equity value of the business. This happens when you meet and exceed the goals that are set out. Many businesses focus on the top line, however at Mazars’ when we work with private businesses, we usually focus on the bottom line.

Markets, products and customers

To start developing an effective strategy for value optimisation requires a clear understanding of the current state of the business in terms of markets, products and customers. Where does the business sit in the market? How does its unique sales proposition compare to competitors? Which products or services are doing well, and which are not? Benchmark the business against its peers. Is it best-in-class, worst-in-class, or somewhere in-between? Armed with this information, you can start identifying the areas to focus on in the optimisation strategy.

Finance and risk

Making good decisions around optimising value needs good financial data. And to have good financial data, you need good processes to capture that data. Take a deep dive into the organisation. Where are the biggest margins? Where are the biggest profit centres? The biggest cost centres? Once you have it, the data can be used to determine future business decisions, like whether to maintain certain customers or segments or switch focus. This should give you the base from which to focus on growing the most profitable areas of the organisation, and determine whether there's things you should stop doing, or that are worth investing in to achieve greater scale and greater profitability.

Business operations

Every process in the value chain within a business’s operations can be broken down into constituent steps. This is called value stream mapping. It enables you to identify inefficiencies and the profit leakages, so you can start to think about how to change it. This should be a regular process, as businesses are constantly changing as new people join the business, and processes are adapted to internal and external pressures.

Also consider how the organisation is structured. Who reports to who? Is it set up the right way? Are there better ways to do it? Once you break it down on paper, it makes things a lot more manageable to identify inefficiencies and make critical changes.

Management and organisation capability

Getting your people on board is an essential part of this process. Many businesses have a follow-the-leader approach, which works well up to a point. But to move up to the next stage of business evolution requires a more dynamic, team-based approach, where all key decision-makers and top level managers, not just owners or C-suite executives, are aligned on what the goal is. The entire team should be  rewarded and incentivised accordingly, for the short, medium and long term goals. Having the right incentives to reward performance leads to greater productivity, which should feed through into stronger value.

It can also help you to look at the controls that are in place. It’s a fact that people perform more effectively if they know their work is going to be reviewed by their immediate supervisor. The key is not to set goals that focus on the weaknesses, but on the strengths, so people are motivated to do the things they are good at, rather than penalised for the things they already know they are not. Whether you have three, four, five goals, the majority should focus on strengths.

Disruption and digital readiness

Digitisation and technology are often among the first value optimisation mechanisms people think off. But although important, technology is not a solution on its own. Businesses often fail to realise the full benefits of their investment in technology because they largely use it to replicate existing processes in digital form. To achieve the optimum return on technology investment, it needs to be part of a more disruptive strategy. Look at how technology can change processes and drive new efficiencies, not just replicate existing processes. Undertaking a technology enablement review can help you decide whether your existing technology investment is delivering on its potential and worth continuing with, or whether it would be better to take a different technology approach.

Taking a focused, strategic and methodical approach to optimising business value helps you to ask the right questions about the right issues, and identify potential growth, sustainability and profitability improvement opportunities. This ensures your business will not only achieve its goals, but will also be resilient and adaptable to a rapidly-evolving world.

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Author: Michael Rofman, Partner, Mazars in USA

Published: 15/11/2022

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