Exit Planning Exchange

By The Bigelow Company LLC

Every business owner who’s thinking of selling his company “someday” wants to know:

“Will a strategic buyer or a private equity buyer value my company more highly?”

There’s no one-size-fits-all answer. Nor is there a one-size-fits-allanswer to how private equity groups value their target acquisitions. Inthis Lesson, we’ll explore three hot-button issues that concern everyfinancial investor – as well as most strategic buyers.

It’s a Seller’s Market

The past ten years have seen explosive growth in private equitytransactions; there is an abundance of capital chasing a limited supplyof solid investment opportunities. With over 1,300 private equity firmsin the U.S. alone, no one can claim to know all the ins and outs of theirvaluation methodologies. Our experience with private equity groupssuggests that there’s almost always a wide value range among competing offers. We have had first hand experience that, when given exactlythe same information about a company, sophisticated financial buyers’purchase offers will vary as much as 50% from one another.

Financial Buyers Focus on Three Key Drivers

Despite the wide variance in private equity offers, they do all share the same common focus: the target acquisition’s potential for future growth. In this regard, they focus on three key indicators of that potential:

• The growth rate in your revenue and profits.

If your growth over the past 3-5 years has been static, they’ll likely look the other way, or assign a modest multiple of cash flow.

• Your EBITDA.

Private equity buyers love companies with high EBITDA margins and low capital requirements. A high EBITDA percentage on revenues validates that your customers value your product and service highly, and find it worth paying for. (The reverse is also true.)

• The amount of debt your business can reasonably carry.

The formulas for determining how much debt a business can supporthave changed significantly as the capital markets have become awash in sources of low-cost secured and unsecured debt capital.

Capital providers are willing and eager to provide both senior secured and subordinated debt to most private equity-backed buyouts. Instead of looking at your fixed assets and receivables for coverage, they’ll look at your EBITDA.

A general rule of thumb in today’s market is that investors will take on senior and subordinated debt of up to four times your EBITDA to finance a recapitalization. For example, we recently helped to sell a company with $5 million in EBITDA, but less than $10 million in total assets.

The purchase price was $35 million – 7x EBITDA. The private equity buyer recapitalized the company’s balance sheet with $20 million in debt (twice the amount of the business’ underlyingassets) in order to finance the purchase – $13 million in secured debt from a bank, and $7 million from a subordinated debt lender.

Every buyer will also look at important qualitative issues such as:

• What industry are you in and what opportunities for futuregrowth exist?

• Are you an industry leader or a “me too” player?

• Is your management team seasoned, solid, and stable?

This qualitative issue will enhance (or depress) the quantitive valuation.  Above all, however, private equity groups are driven by one thing – their potential rate of return on investment.

Given These Key Drivers, Why Do Valuations Vary So Widely?

Every private equity group has its own unique attributes. Some focus on industries in which they have experience and expertise, while others look for synergy with the existing companies in their portfolios. New funds are particularly eager to make acquisitions in order to develop a track record, while mature funds may look aggressively for one final investment in order to wrap up the Fund.  The challenge for an intermediary is to find the best-fit investor with the greatest motivation.  That investor will usually value your business most highly.

A Game Plan for Attracting Rich Suitors

Knowing what private equity buyers care about points the way to an action plan for increasing the future valuation of your business:

• Follow a business plan that represents strong opportunity for growth.  For some companies, that may mean taking on more risk than they’ve been accustomed to in the past – especially if their owners have been investing only their personal capital in order to grow (See Lesson #1).

• Focus on your EBITDA.  If you can raise your profit margin onrevenues, it will validate your attractiveness to potential suitors.

• Be careful about marginally useful capital investments in your business. A financial buyer will want to know the history of your capital requirements. A pattern of inordinately high, ongoing capital investment can scare off an acquirer.

By Thinking Like an Acquirer, Forest Frames Earned an Exceptional Valuation

When Woody Beeman tapped into the growing demand for prefabricated lumber products, he quickly outstripped his mom and pop lumberyard competitors. He developed a supply chain and processes that saved time, waste, and errors, and built a loyal customer base. After15 years of steady growth, Woody was ready to hang up his hammer, but saw that the company was not yet ready to attract its full potential valuation.  Knowing that he needed diamond blade talent to carve a compelling story, Woody hired a visionary CEO and designed a program for him to receive a 15% stake in the business.  Tom Barrett understood capital gain events, and what both strategic and private equity buyers look for in an acquisition. He started with a blueprint of buyer expectations – and worked backward to map their goals to Forest Frames’ existing business plan.  He knew that private equity groups want a solid ground floor (exceptional EBITDA over several years) with a well-designed stairway to a lofty future. He also knew that acquirers tend to devalue capital-intensive operations that are likely to demand ongoing investment in fixed assets. And they like ideas and processes that can bereplicated.

Tom developed an aggressive growth plan for Forest Frames Industries based on a strategy that changed his competitive playing field. Realizing that on-time, predictable delivery was the perennial concern for both Big Box retailers and independent contractors, he invested in equipment that allowed him to produce custom framing products on a just-in-time basis. With guaranteed 24-hour delivery, most customers were happy to pay a premium for a higher quality product, delivered exactly when they needed it. They couldn’t get this service from any of Forest Frames’ competitors.

When Woody and Tom asked The Bigelow Company to represent Forest Frames to potential investors, the company had a solid, three-year history of outstanding EBITDA, minimal capital requirements, a loyal customer base, and a concept that could be replicated in other regions. Motivated on an incentive piecework plan and profit sharing, their workers ran three shifts to achieve better throughput and productivity.

Not surprisingly, Forest Frames received more than a handful of high-multiple bids.  They picked a private equity group with other construction-related companies in its portfolio that was willing to pay 8x EBITDA. Woody cashed out and Tom continued on to build and capture an even higher value for the new majority owners and himself in a subsequent transaction.

This “Lesson Learned for Building and Capturing Value” reflects knowledge and insights we’ve gained working with dozens of privately-held companies throughout North America.  For more information about The Bigelow Company, visit www.bigelowco.com or call us at 603-433-6000 for a confidential discussion of your unique situation.

By Chris M. Mellen

“The EBIT and EBITDA Multiples”

In general, the three rules of business valuation are: earnings, earnings, earnings. Getting back to the fundamentals, if stockholders want to receive a fair return, the underlying company must at some point generate sufficient earnings to allow potential subsequent owners to achieve the same. However, the term “earnings” is a broad term that can have many meanings from pretax income to net cash flows. Earnings can be measured and used in discounted cash flow analyses, public company or transaction multiple analyses, or in one of many other types of analyses.

Two of the most common multiples used to value a business are the EBIT and EBITDA (earnings before interest, taxes, depreciation and amortization) multiples. These represent two of many possible levels of earnings used within both the guideline public company method and the M&A transaction method of the market approach to value. EBIT is often defined as net income plus income tax expense plus interest expense. Both EBIT and EBITDA are what the company would have earned if not for obligations to its creditors and the tax authorities. Both multiples are pre-tax and pre-debt, and thus reflect a level of earnings available for debt service, stockholders, and in the case of EBITDA, capital expenditures (assuming depreciation and amortization on average reflect the required level of capital expenditures). As such, they measure earnings at a level that captures solely the company’s underlying operating performance. Therefore, it does not matter if the company being valued has a significantly different capital structure or tax position as compared to the guideline companies from which the multiples are being derived (one of the significant weaknesses of the P/E multiple). EBIT multiples are useful where differences in accounting for noncash charges (e.g., depreciation) are not significant. EBITDA multiples are particularly favored to eliminate differences in depreciation policies, and get closer to a company’s underlying performance.

EBITDA multiples1 are typically referred to as “unlevered”, debt-free, or invested capital multiples, which means that the numerator in the multiple is the sum of all common and preferred stock and interest-bearing debt in a business enterprise. Therefore, if common stock is being valued using these multiples, the value of senior securities (e.g., interest-bearing debt and preferred stock) must be subtracted from the resulting “unlevered” indicated value to arrive at the indicated value of the company’s equity.

EBITDA was originally used to gauge a company’s ability to service its debt in the short-run, by indicating whether there was sufficient operating income to meet interest payments. However, when using EBITDA multiples, one must be aware of the many traps leading to their misuse. How was the multiple derived? Was it by a rule of thumb, which may have no direct relevance to the company being valued? What public companies or acquisitions were used to derive the EBITDA multiple? How was the multiple ultimately determined from these sources? Does the EBITDA of the subject company reflect proper economic adjustments? Is it based on current year, an average of prior years, or a weighted average of prior years? Is it properly reflecting future growth potential?

There are several other limitations to be aware of when using EBITDA multiples as an indication of value. By definition, EBITDA ignores interest and other expenses that can account for a material portion of a company’s cash outflow. In addition, it ignores cash outlays for capital expenditures and changes in working capital, and thus may not be realistic. That is, EBITDA multiples ultimately overstate value in times of working capital growth and significant capital improvements. In addition, it says nothing about the quality of earnings and ignores distinctions in the quality of cash flow resulting from differing accounting policies.

The Bottom Line: Despite their shortcomings, EBIT and EBITDA multiples are often legitimate indicators of value. But they are just two ways to get such an indication. They are inadequate stand-alone measures of a company’s value. They do not reflect future cash flow, which is the level of “earnings” ultimately available to investors and thus the source of equity value. Their misuse can lead to a wrong valuation. Their mishandling has been at least partially responsible for the bad deals done in recent years and the decline in company values, and thus increased goodwill impairment, today and in the future.

Valuations play a part in many tax, litigation, financial reporting, transaction, and strategic matters.

If we can provide additional information or advice on a current situation, please call us.

Delphi Valuation Advisors, Inc. Values Your Business!

Chris M. Mellen, ASA, MCBA, MBA

President – Delphi Valuation Advisors, Inc.

Boston Affiliate of the American Business Appraisers® National Network

By William S. Andronico and Craig Eaton

As the U.S. emerges from the recession that has plagued the economy during the past 18 months, private equity firms that have been entrenched in their investments are beginning to evaluate exit options in the hopes of earning what is now a long overdue return on their investments. However, there is still a lot of uncertainty on the horizon and as a result, transactions are being subjected to deeper scrutiny as buyers seek out companies with a compelling growth story that can withstand today’s prolonged due diligence process.

In this market, there is no guarantee that any exit will be as timely or profitable as fund investors would hope or require, but market ready businesses can still be sold quickly and at a solid multiple. The key to success? Strategically preparing for an exit. Not only will exit readiness enable the efficient execution of a sale, but it will also maximize its value.

How Important Is Exit Readiness?

As credit markets have tightened, it has become even more critical that companies looking to sell anticipate risks and issues that might arise and potentially disrupt, or lower the value of a deal. Buyers will undoubtedly uncover any hidden problems during the buy-side due diligence process; therefore, it’s important that the seller is aware of any “hidden gems” and has that knowledge available when negotiating sale price.

In addition, there is an ever-present “need for speed” during any transaction, particularly given the drain on management’s time and energy associated with preparing for and executing a sale. In order to quickly and effectively execute a transaction, it’s critical that the seller is fully prepared to exit when the business is taken to market. If not, the seller risks exposing the company to the buyer, prolonging the deal and ultimately lowering the sale price.

Sell-side Due Diligence: Readying For An Exit

Sell-side due diligence is a valuable component of any exit strategy, particularly in today’s uncertain economic environment. Sophisticated bidders have advisors on hand to find any problems within the business and therefore, it’s important that the seller has taken an in-depth look at the company in advance to prevent any unwanted surprises. Sell-side due diligence allows the seller to proactively address any risk areas of the deal and can even expedite the transaction process. Well executed sell-side due diligence includes a thorough assessment of the financial health of the company, as well as an evaluation of all operational, technological and human resource issues. A thorough sell-side due diligence partner assists with five critical phases of the deal:

1. Pre-sale planning. The seller and its due diligence partner must identify any potential issues in order to avoid broken deals or decreased valuations. Pre-sale planning includes performing due diligence and preparing an analysis of the business positioning, providing support and insight for the information memorandum and assessing the baseline valuations range, among other activities.
2. Data room and management presentations. It’s critical to develop financial data and schedules on a basis of accounting consistent with the information memorandum.
3. Negotiation and execution. Sell-side due diligence enables the seller to anticipate the purchaser’s challenges to valuation, support negotiations from a fact-based position of strength and avoid any delays to the transaction process.
4. Operational separation. The seller and its due diligence partner must proactively identify any stand-alone issues including commercial and customer risks, and analyze the cost of those issues.
5. Post-closing issues. Once the deal is closed, the information garnered via thorough sell-side due diligence can help with purchase price adjustments and other post-closing issues that might arise.

Sell-side due diligence allows sellers to counter transactional risks by taking a proactive approach to mitigate potential deal breaking issues. Before moving forward with a potential deal, sellers should:

• Evaluate the financial health of the company by assessing the quality of earnings and identifying any non-recurring charges or credits to maximize the company’s value;
• Develop realistic budgets and forecasts;
• Assess trends in revenues and EBITDA to identify key business drivers;
• Appraise the quality of assets to be sold and liabilities that would be assumed;
• Evaluate trends in required working capital and develop a target working capital level in advance of the purchase agreement;
• Appraise the impacts of fixed versus variable costs, capital expenditure requirements and the importance of certain administrative activities;
• Identify internal management and operational weaknesses, as well as any potential transitional issues;
• Identify tax risks including federal, state and sales tax obligations;
• Determine the optimal tax structure of the seller before the deal and for the deal, and evaluate the impact on potential buyers;
• Consider related party activities and the related transfer pricing or intercompany activities;
• Define key terms and expectations in purchase agreements;
• Mind the GAAP (Generally Accepted Accounting Principles)

Tax Pitfalls and Opportunities

Whether the exit involves an IPO, a strategic/financial acquisition, or another exit option, tax matters can and do drive valuation, specifically when valuable tax assets such as net operating losses and tax credits exist. Two primary areas that require attention are the deal structure and the optimization of the underlying tax assets residing within the target.

From the seller’s perspective, it is essential to:

• Negotiate whether the sale will be an asset sale or a sale of stock. From a tax standpoint, a stock sale will generally benefit the seller and therefore, if it is an asset sale, it’s important to get a premium on the asset sale to put the seller in the same after-tax cash position.
• Consider state tax exposures prior to sale and to mitigate any concerns that might arise. For example, the seller should look at how to structure the sale from a state income tax perspective, evaluating ways to allocate income to low-tax states.
• Look at items such as tax accounting methods that might trigger income on an asset or stock sale, and evaluate how to mitigate the impact on the sale.
• Look for the possibility of tax-free reorganizations, particularly if dealing with a public strategic buyer.

An agreement between the parties related to taxes on a pre- and post- transaction basis should be drafted. Issues related to taxes such as documentation related to basis, net operating losses and credits come up several years after transactions are completed and it is important to identify the responsibilities of both the seller and buyer. This includes taxes triggered through change-of-control payments.

The choice of entity and whether the sale is structured as the sale of stock, a straight asset sale or a deemed asset sale can have many variables that should be considered prior to sale.

Looking Ahead…

As markets and exit multiples continue to stabilize and investor demand for liquidity continues, private equity firms are seizing the opportunity for potential exit strategies – looking to maximize the return on their investments. However, planning how to exit an investment is just as important as completing the transaction. Companies should be sure they’ve considered all options and invest proactively in presale diligence to expedite the sale process, maintain control and credibility, and enhance exit value.

By Larry Girouard

Terms like strategic plan, business modeling, data collection, data generation, business “Outcome”, algorithms, and the like, are not words that are commonly used in today’s business meetings. (Note: Outcome is defined as all the goods, services and touch points that a customer encounters when dealing with your company. The company outcome is what the company delivers, and the customer experience is how the customer relates to this outcome.) I am reminded of presentations that I made in 2007 at a half dozen conventions around the country. I role-played with the audiences of CEOs and senior managers, asking them to pretend that I was the decision maker at a target account that they were trying to penetrate. If they had just 15 minutes to convince me to buy a product or service from their company versus their competition, what would they present to me?

I asked them to take 60 seconds to write down five items that they would discuss. At the end of the minute many had not completed this short list of five items. Surprised! Try it yourself … one minute and five key items. The fact that this was not an easy exercise for these senior managers is significant.

The second question I asked, with a show of hands, was, “How many of your company’s measure the performance on the five, or less, items listed on your sheet?” I would be exaggerating if I said that more than 1%-2% raised their hands.

The fact is that very few companies measure anything beyond financial performance. If I am the buying influence at a target account, I am inundated with sales people telling me how great their companies are, yet, almost no company presents the historical performance data to convince me that their value proposition has any punch behind it. As the buying influence, on what basis do I make my decision?

I had one attendee that listed “Our experienced people” as one of their five. To that point I responded as the buying influence, “So what, what does that mean to me?” I understand what “on time delivery” means to me, but I do not have a clue how “having experienced people” impacts my company. The measured quality of the work from these “experienced employees”, and how this quality impacts what I am buying from your company, will certainly play a part in my decision making.

When you think about it, the buying influence at a customer or target account only cares about the ”Outcome” from your company, and how it meets their needs. The buying influence could care less what happens inside your company. As the buying influence, I am only concerned about minimizing my risk and the validation of my decision through superior performance when I choose to buy your goods and services.

Experienced people mean little to me unless the ”Outcome” of their work is better, faster, and more accurate than that of your competition. How do you measure the “Outcome” of your experienced people that will convince me that it is worth the risk to use your company as a supplier? Dave Nash, President of Engage Marketing, a RI consulting firm, says it best when he states, “You must give me a real reason to believe!” Looking at your business from the customer’s perspective, and listing (modeling) the elements of the ”

“Outcome”, will help you to begin to identify the customer experience, the real product/service that you are delivering.

Five Required Elements for Designing the “Customer Experience”

“If you can’t measure it, you can’t manage it”, and “What gets measured gets done”, are both terms that we have all heard many times. Bringing measurement into the corporate culture is a challenge for any company. By focusing on the company ”Outcome”, management and employees can now concentrate on what the customer is receiving. In total, this represents a company’s product, product offering or value proposition. There are five fundamental elements that must be addressed by any management team before beginning to design a company’s ”Customer Experience”.

1) Management must accept the fact that quantifying the business “Outcome”, or “Customer Experience”, is the cornerstone for building and sustaining an effective market penetration program.

2) Management must passionately and unconditionally embrace the quantification of all elements of the “Outcome”.

3) Management teams must come to grips with the fact that measurement will be met with resistance from many people up and down the organization chart. Management must work through the acceptance process of measuring, and being measured, for both management and the employees.

4) Management must apply measurement evenly throughout the corporation. Rank does not have its privilege, especially for the CEO and senior managers.

5) Management must empower its employees to both help develop the measurement system, and to implement the resulting system. Employee involvement in this process is critical ensure “buy-in” throughout the organization.

The Importance of Employee Involvement

In general, most people resist being measured because its very mention recalls past memories where being measured had negative results for them. Perhaps low test scores in school, or unattained goals in the business community were the reasons. Whatever the cause, in most cases, measurements were used to punish, or take something away, rather than inspire or reward for performance excellence.

The value of the ”Outcome” from any company to its target market is directly proportional to the value added sum of its components. The employees add most of the “value added” components to the “Outcome” because they are the people that interact with your customers on a regular basis. Employees answer the phone, and they get back to customers with answers to most questions like order status and technical issues. They are on the production line running the machines that make our products, etc.

Employees make the “Customer Experience” happen. Most of the communication between a customer and the company is impacted by the performance of these employees. It’s their system to create and drive. It’s management’s role to motivate and empower their employees to do it, and provide them with all the tools and support they need to succeed.

To effectively improve the ”Customer Experience”, the employees must be an integral part of the process. The CEO and senior management add relatively little to the “Customer Experience”. Management just sets the stage for employee performance.

Where do you start? Customer “Touch Points”!

A business associate of mine, Tom Pesaturo, President of Exceeda Consulting, clearly states that, before you march too far along the thought process of establishing the vision for your company, it is important to define the “as is”. The “as is” defines the current performance level for the “Customer Experience”. It’s the “as is” that cements the starting point for a company’s journey to performance excellence. Easy to say, but because most companies measure very little, defining the “as is” in terms of concrete measurements offers up a challenging task.

I suggest that you look at the current state of the company from the standpoint of the customer as the starting point. Conversely, starting this process by defining the internal workings of your company in measurement terms would be a much more complex undertaking and likely to be met with high employee resistance. Looking at the ”Outcome” of the company is more approachable, and not as threatening to management or employees. The ”Outcome” is the summation of all the touch points that represent the totality of the “Customer Experience”. It begins with the initial contact between the customer and the company, usually starting with the first phone call, and is ongoing through every touch point that a customer experiences such as:

a) Initial call into the company

b) On Time Delivery

c) Product quality

d) Response time to questions of any nature … technical, order status, billing status, and the like.

e) In retail or hospitality, anything that impacts the customer’s senses are all considered part of the family of touch points.

f) The quality of all written or oral communication

g) Website and Collateral

(Note: This list could be 20 – 30 elements, or more).

Different types of companies will have varying families of touch points, but the approach is the same.

Once a company makes a comprehensive list of the key elements that make up their customer’s ”Customer Experience”, they can then begin to look at each element, one at a time, with respect to their corporate performance on each. This is the first step for a company to determine the “as is”. True to form, the results of this exercise are usually very revealing, and disappointed to most companies, especially if all these elements are looked at objectively.

Most companies must look at other means to differentiate their products. There are few options. Optimizing the ”Customer Experience” is a great way to do it. Few, if any, of a company’s competitors really focus on this aspect of their businesses in a formal and structured manner. This presents a real opportunity for your company to differentiate your product offering and value proposition in a quantifiable manner.

Once the ”Customer Experience” is outlined, and the appropriate measurements applied to each element, the “as is” will be well defined. This then begs the question … Is the “as is” good enough” to be used as a sales tool to penetrate the market? This is the moment of truth for most companies. Keeping it real, what comes next?

For the initial steps, I suggest you try the following:

1) Break the ”Outcome” down into all the elements that have been identified and look at each one as a stand alone entity. To develop a list, have a 60-minute brainstorming session with your managers and employees and generate a list of customer needs, wants and complaints. You might have 30, or more, items on this list but it will represent a good starting point and a very large percentage of the actual “Outcome”.

2) Rank each element in the order of importance with respect to the ones that you feel are the most important to your customer.

3) Pick one of the key elements, like “on time delivery”, and begin to track and measure the reasons why you are late for each order, or request, over a period of time … say 1-2 months. The important point here is that every order, or request, must be included in the analysis. (Note: You must first establish the criteria for when an order is late, and this criteria must be in line with your customer’s criteria)

Do the same for the other elements of the ”Outcome”. By the way, once you start measuring corporate performance levels, and listing the reason why something was not met, employees will automatically start paying more attention to their role in any specific element of the ”Outcome”. When you think about it, employees control well over 85% of the “Outcome” or “Customer Experience”. As a result, they must be 85% of the solution. It cannot be forced on them by management or push-back is guaranteed. Some elements of the ”Outcome” are more difficult to measure. For example, how does the receptionist answer the phone? One of my clients has given the receptionist the title, Director of First Impressions, and this person was trained in how to deliver “great phone”. It is not measured specifically, but it is addressed.

4) After a period of data collection you will begin to see patterns. For example, one company had issues with the length of time it took for them to get back to a customer with lead times for any order. It could take up to 2 weeks or more. They modeled the process of where the request went and the time that the request stayed in any one location. It was a very simple model. As they collected data they were able to define the key contributor(s) to the delay. Customer Service (CS) collected all the data because they owned the particular customer request.

It was initially explained to all employees the importance of getting back to customers quickly with answers to all their requests as part of the overall ”Customer Experience”. Engineering was the bottleneck in this case and it really stood out. Now responses to lead time requests are well under one week, except for unusual circumstances.

Because this particular example was only a part of an overall program to improve the ”Outcome”, there were many examples where other departments represented the bottle neck. Once a management team begins to model the elements of the “Outcome” in a very graphic manner, it is much easier for all the stakeholders to see the value of their role in optimizing the “Outcome”. Also, with historical measurements applied to each segment of the model, corporate performance and performance improvement becomes more visible.

There is a visual process called “Value Stream Mapping” that has been used very effectively in organizations that have the real passion for continuous improvement.

While some business elements are more complex to model than the example presented, the approach is the same. Eventually, as all the elements are integrated together, you begin to get a visual representation of your business ”Outcome” in real time, or close to real time. I call this the Everest of business modeling because few companies ever have the resolve to follow through on modeling the complete ”Outcome”, with all, or most, its elements. Changing business culture can be a herculean challenge. There are many reasons why it doesn’t get done, but if the CEO has the vision, commitment, humility and passion to see it though, the rewards are great.

The Optimized “Customer Experience”

Real Market Differentiation for market penetration

Step back for a moment and envision that the ”Outcome” for your company has been modeled, measured, and optimized. Your company employees are tuned in to the measurements that frame that “Outcome”, and are using these recorded measurements as one of the tools to help direct their day-to-day behavior. Your sales department is now utilizing the ”Outcome” data as an integral part of their sales presentation. Your company collateral refers to the “Outcome” (“Customer Experience”), using historical data to present your corporate commitment to performance excellence.

The image of your company in the market place is largely derived from the company’s ability to drive the “Customer Experience” to higher levels. Remember, it will be very rare for competition to utilize this same selling technique because few, if any, have brought measurement into their business culture as a vehicle to differentiate their product offering and value proposition. Your company would stand alone in the competitive field, taking the “top of the hill” because of your exceptional service level.

Based on your company’s historically measured performance, in time you will be able to make guarantees that will be the envy of your competition. Your sales team can sell with confidence because they know the performance data is real. They will resist the temptation to oversell because they will not need to.

Self-Sustaining Measurement Culture

As mentioned earlier, bringing measurement into the business culture is a difficult process. Initial resistance from all, or most, employees will be high. That being said, with the resolve of the CEO and senior management, and empowerment of the employees to implement their input, measurement will slowly be embraced by both management and the employees if there is a clear “win” outlined for all involved.

For example, one win for the employees may be a bonus based on the profit/employee number. As the  ”Customer Experience” improves, corporate efficiency will also improve. The “Customer Experience” cannot improve without some proportional improvement in corporate efficiency. As sales from the improved “Customer Experience” increases, it will do so without a proportional increase in the number of employees and, by default, the profit/employee will increase. Again, this represents one win for the employees.

If you accept the fact that modeling and measuring the ”Customer Experience” (The “Outcome”) of your business is a common sense approach to start your corporate change process, congratulations! That is the first step, and you are on your way.

While measuring performance can be very intimidating, measuring the corporate “Outcome” is a much easier concept to embrace as the initial step because real teamwork between corporate functions will be required. The members of the cross-functional teams will work out the processes to optimize the “Outcome”. Solutions will come from the bottom up and, therefore, more sustainable. Also, with this level of employee involvement they feel much more like they are part of the team. This culture is one where their efforts are better recognized. Improved corporate efficiencies has a direct impact the lowering the stress levels among employees.

The CEO must encourage and allow this process to evolve through employee empowerment. You have heard the term “journey” used throughout articles and books written on the subject of change. The Malcolm Baldrige National Quality Award constantly describes the road to performance excellence as a journey. I have had the opportunity to be involved with many journeys and can attest to the fact that it is well worth the ride.

Differentiation, The Customer Experience, EBITDA, and Business Valuation

There are many factors that impact the overall value of a business that a buyer is willing to pay for. Consider the approach outlined above with respect to business valuation:

1)  Optimizing the “Outcome” …. in order for this to happen there must be a corresponding improvement in company efficiency.

2)  Market Penetration … a measured and improved “Outcome” provides the foundation for any Market penetration initiatives, and help establish a corporate brand.

3) Corporate Efficiency … As employees improve corporate overall efficiency and begin to penetrate the market, sales/employee and profit/employee will increase because the improved efficiency will enable employees to do “more with less”.

4) Impact on EBITDA …. improved efficiency, driven by the employees, will result in additional monies dropping the to bottom line. These monies can be allocated to EBITDA, bonuses for employees, and business reinvestment. Regardless of how you slice the pie, EBITDA will be positively impacted.

5) Business Valuation … A strong sustainable business culture, and solid EBITDA performance, will better position your company for a higher business valuation, regardless of the business segment served.

So few companies approach their business in the way described above that, in doing do, your competitive position will be greatly enhanced.

*** END ***

Larry Girouard is the CEO of The Business Avionix Company, established in 2002

Published as a 3 part series in the Woonsocket Call, a Northern Rhode Island newspaper … February, 2010