Increasing the value of your glass business
Second in series of a two-part article. See Page 38 of the June 2009 issue for the first part.
In June's article “Valuing your glass business” we introduced a basic approach to valuation and how to think about the worth of your glass company. Here we are going to explore ideas and techniques that shareholders and operators of glass retailers and distributors, glazing contractors, and auto glass replacement and repair shops alike can use as they think about value-creating strategies—ways to increase the value of their business.
Value creation begins with alignment of the stakeholders surrounding your company; the need to have company stakeholders act together has never been more important as you compete in today’s market. While there are many ways to approach planning and alignment of stakeholders, what is important is that you find a process or set of tools that work for your organization and use them. Our firm uses a process that we developed called the Growth Strategy Navigator. This has been honed during the past 20 years and implemented with companies ranging from startups to multinational enterprises with more than half a billion in annual revenues. This process tends to deliver the optimum balance between planning and doing, relative to the wide array of planning models available. The process serves to focus the company on the right things at the right time, even when facing turbulent market conditions and stiff competition for resources. For the purposes of this article, we will extract a few excerpts for review.
In concept, there are two generic approaches to increase the value of a company:
- Pursue strategies that increase earnings, cash flow and the return on invested capital (net assets minus non-interest-bearing debt).
- Pursue strategies that reduce the risk of investment in your company, thus reducing the cost of capital.
This probably sounds like it came from a text book. Not to worry; there are practical actions you can take. Let’s explore a few.
Increasing the return on invested capital
Invested capital is the money you have put to work in the business that will require a return in some form. Increasing the return on invested capital is done by either improving the cash flow from your business using the existing resources or decreasing the amount of capital required to operate the business while continuing to produce the current level of cash flow. Here is a list of long-range ideas to consider in the planning process:
- Strengthen your management team. A relatively stronger management team will ideally operate the business more effectively. So increasing the talent of the team will create long-term value.
- Establish and meet clear valuation changing milestones. The process of identifying the specific value drivers of your business and setting goals to improve them helps the entire team know what is important and where to focus.
- Setting or moving industry standards. What are the rules of thumb that you use to measure your businesses performance? When estimating a job or project, what benchmarks do you use and why? Challenge these standards and find creative ways to significantly improve upon them. A commonly used set of tools to do this—and get waste out of business processes—is called “Lean.” A good starter article can be found at http://en.wikipedia.org/wiki/Lean_manufacturing. The results can be decreased waste in business and production processes; new value and capabilities for servicing customers; and increased competitiveness and improved margins and cash flow.
For more immediate results, consider some of these practical tactics to implement in your day-to-day operations:
- Evaluate pricing. Are you pricing your services and products correctly? Test the price of your products and services based on the market and not just on cost. You may find that there is room for increased pricing or incremental value you can add that will allow you to improve margins. In many businesses, most of the increased margin flows directly through to increased cash flow and profits.
- Tighten accounts receivables. Proactively manage collections of outstanding accounts receivables. Do not wait until they are past due. Confirm early that your customer has received and processed invoices and that they are scheduled for payment. You may consider monitoring overall customer payment trends using a third-party service, and controlling their available credit to assure you do not take extraordinary credit risk. Additionally, you may consider purchasing accounts receivables insurance to protect against customer bankruptcy or failure.
- Reduce inventory. Improved production and project planning coupled with just-in-time receipt of inventory can increase inventory turns and reduce the amount of working capital required to operate the business.
Reduce the risk of investment
At first glance, the concept of reducing the risk of investment in your company may seem to be theoretical or abstract, but it is not. Balanced risk affects many aspects of the business, from the cost of money borrowed from the bank to the price a buyer may be willing to pay if you desire to sell your company. As you work through the planning and alignment process and contemplate the long-term strategy of your business, you may want to consider the following:
- Reduce the dependence on the owner/operator. Many businesses are founded and managed by the owner/operator. How the business operates, key customer and supplier relationships are managed by him (or her), key employees look to him for leadership. In short, the business revolves around them. While this may be flattering, it detracts from the long-term value of the business. In planning and strategy development, find ways to institutionalize and document key processes so that others can follow them and achieve the same business performance without the owner/operator involved. Mentor and train the next level of management so that key company knowledge is held within the group and not within one individual. And lastly, as a management team is built, enable the development of relationships with key customers and suppliers with the team members. Combined, the company will become less dependent upon the owner/operator and will have a foundation for growth.
- Manage customer concentration. Dependence on a single or small handful of customers tend to depress company valuations, regardless of company size. Seek ways to develop a balanced group of customers that are seen as creditworthy and valuable, so that the loss of any single one will not cause your business to fail.
- Manage supplier concentration. Just as with customers, concentration for the supply of materials or labor on any single entity might be cause for concern, especially if what they provide is unique. If you have key suppliers, seek written agreements that guarantee your company’s ability to buy from that supplier. Better yet, establish a supply plan and develop backup sources.
- Appropriately capitalize the company. An all equity funded company is using expensive capital while an all debt funded company is constantly at risk of failure. Finding the right balance of debt and equity is the key to obtaining the optimum (and lowest) cost of capital; the typical range of debt to equity ratios for glass companies is 1.90 to 2.35. Your debt to equity ratio can be calculated by dividing the sum of your current liabilities and your long-term liabilities by the net worth or members equity, all from your company’s balance sheet.
Value is based on the amount and growth of future cash flows of the business, and how predictable it is. Our experience in founding, growing and exiting businesses—and in each case seeking to create significant value for our shareholders—has shown us that the key to value creation begins with a well conceived and thoughtful strategic plan leveraging a unique competitive position in the market place. This combined with a solid and credible management team enables the growth and success for the stakeholders involved.