Unpacking stage one of value maturity: Identify
January 30, 2019
By Martha Sullivan, CPA, CVA/ABV, CM&AA, CEPA
Partner, Succession Planning Practice Leader
Martha leads HK’s succession and exit planning services division and is a regular contributor to Wisconsin’s InBusiness digital magazine.
In my last post, Introducing the 5 stages of value maturity, the question was posed: Where is your company at within the stages of value maturity? When something is mature, it’s fully developed, completed, or elaborated. This includes the value of your business. The question challenges you to assess how well developed the value of your company is. Is it meeting its full potential?
Savvy business owners and leaders are increasingly aware of the important concept of value maturity. She knows what stage of maturity her company is at. He knows, given objective data, what he needs to do in the company and with his team to advance to the next stage. They are engaging their management team and employees, driving the company forward, and maximizing its potential.
One of the common pushbacks I hear around involving management teams in value-enhancement initiatives for the company is that owners don’t want their team to think that they are selling the company or that it’s all about the money. Value maturity does not care whether selling the company is on your immediate radar or not. It’s purely good business strategy for the health of your company.
The five stages — Identify, Protect, Build, Harvest, and Manage — are both a progression and a recurring cycle. Yes, within Harvest owners are challenged to ask themselves if they want to continue to invest in the company or start investing in crafting a successful transition. Both alternatives demand investment, but there is no predisposition to either answer. The expectation is that management continuously drives the business forward using the value maturity and acceleration models. Trust me, your management team wants a healthy company as much as you do. Engage them.
Over this and the next four posts, we’ll explore each stage and how to embrace the work to be done to drive your continued business success forward.
Stage one: Identify
This stage focuses on assessing and inventorying the qualities, characteristics, and potential value of the business in an objective and unvarnished manner. Your goal in Identify is to gather data, opinions, and perspectives about where the company is today — beauty, blemishes, and all. You and your team accomplish this goal in three distinct steps:
- Get a calculation of value of the company from an independent, qualified, and credentialed provider.
- Perform a risk and readiness assessment of the business with your management team and an objective, independent facilitator.
- Develop an action plan based upon your findings.
While the steps are distinct, you must complete all three in sequence to reap the benefits of and ability to graduate to Stage two: Protect.
Calculation of value: There are two levels of business valuation that are performed by independent business valuation analysts — a calculation of value and a conclusion of value. You want a calculation, which is the simpler and less expensive approach. (The conclusion of value is called for when you are dealing with the IRS in gifting and estate matters, or the courts in situations of divorce or dispute.)
Some readers may be thinking, “I don’t need that. I know what the value of my business is,” even though they haven’t had a valuation analysis performed. The fact is, nine times out of 10, business owners who say this discover that the number they “knew” is different than the number the market or an arms-length investor would assign to it. Assumptions such as these lead to surprise and often disappointment.
Those who embrace the valuation process find it’s very instructive and illuminating. It may be the first time a business leader learns what goes into determining a business value or offer to purchase. With this knowledge, you’re better positioned to act, particularly if the number isn’t what you expected it to be.
Business assessment: The business assessment is the next logical step in Identify. In the assessment, key aspects of the business are reviewed to detect the risks that threaten the company’s sustainability and transferability. Generally, eight key aspects of the business are reviewed — leadership, planning, sales, marketing, people, operations, finance, and legal — and scored to provide an overall profile of company risk and readiness.
The assessment risk score and the valuation work hand in hand. Value is the mathematical equivalent of perceived risk, reward, and transferability. The assessment dives deeper to discover and clarify the risk factors you can improve in your business to impact your value.
It’s best to undertake the business assessment as a management team in a facilitated discussion. Together as a group, you and your managers discuss aspects of the business that you rarely talk about due to the daily pressures of your “real work.” However, these very discussions are the real work of leadership, worthy of airing perspectives, debating, and creating shared understandings. Make sure your facilitator is skilled in keeping the conversation on track, drawing all participants into the conversation, and challenging you all when too much of your own Kool-Aid has been consumed.
Action plan: The first two steps are all about discovering the strengths, weaknesses, and risks within the company. After taking these steps, you may see your company mission and vision differently. Your goals, objectives, strategies, and action plans will change. In this final step of Identify, you and your team clarify, refine, and document these fundamental business plan elements in writing. Whether you refer to this document as your business plan, action plan, or strategic plan is not important; what is important is that you have a plan that you share, communicate, and use as a filter in your decision-making going forward and to guide your efforts as you graduate to Stage two: Protect.
Identify on its face is straightforward. Your goal is to identify what you have and what you want to do with it. Straightforward, however, is not the same as simple.
Business owners who embrace and undertake the Identify stage know that they need to routinely challenge the status quo, which is anything but simple. These men and women, like you, are the bold ones — willing to have these discussions and do the work of discovery. Recognize it will demand openness and vulnerability. While these aren’t the first words that come to mind when describing yourself as the stereotypical intrepid, successful entrepreneur, they are your mark as a courageous leader.
Armed with such courage and the information you assemble in the Identify stage, you’re ready to move on to Stage two: Protect.