Owning a business involves navigating numerous risks. To boost value and minimize these risks, it’s crucial to follow the Five Stages of Value Maturity outlined in Christopher Snider’s book, Walking to Destiny.
The Five Stages of Value Maturity form the backbone of the Value Acceleration Methodology, a process designed to help business owners grow and eventually harvest the value of their company, ensuring long-term success. Integrating these stages into your business strategy can transform your company from merely achieving annual success to becoming a significant, sellable entity.
While the Value Acceleration Methodology might seem complex, we’ve simplified each stage to facilitate discussions with your clients.
Five Stages of Value Maturity
Identify
It’s estimated that 80-90% of your net worth is tied up in your business. To unlock this value, a system for determining your business’s hidden value is essential.
As Walking to Destiny states, “the ability to unlock that value at some point in the future will make a significant difference to your lifestyle and, at the exit, will fund your next act.”
Without a professional business valuation, planning for the future is challenging.
Conducting an annual business valuation is crucial. It highlights areas of risk, shows improvements, and ensures that your business goals are met.
Protect
After identifying your baseline business value, protect it by developing an action plan to manage risks, including personal, financial, and business risks.
As Snider writes, “protecting value is the first step in building value.”
Ensuring your business can operate effectively without you is a vital aspect of this stage. This involves decentralizing the owner’s role, preparing the business for the owner’s eventual exit, and ensuring that procedures, financials, and customer bases are well-documented and not solely dependent on the owner.
Build
With your existing value protected, focus shifts to building value. This can be achieved by increasing your cash flow (EBITDA) and improving your business multiple, which reflects the value of your tangible and intangible assets and their associated risks. Intangible assets include Human, Structural, Customer, and Social Capital.
Strengthening these intangible capitals is key to building business value.
According to Walking to Destiny, “62% of owners indicated that finding and retaining top talent is the biggest challenge they face.”
Developing your employees and fostering a strong organizational vision and purpose are crucial for enhancing Social Capital.
Customer Capital has evolved from simple goodwill to the lifetime value of a customer, which holds significant financial value.
Structural Capital, the most robust intangible asset, encompasses everything that ensures your company runs efficiently, such as processes, documentation, training programs, technology, tools, equipment, and real estate.
Harvest
After building your business value, it’s time to harvest the rewards. There are various paths for exiting your business. Engaging an investment banker and business advisor can help maximize the value of your exit. You might choose to sell the business, transition it to a family member, or explore other options.
A common issue owners face is confusing enterprise value with net proceeds—the actual amount received after taxes, fees, debts, and other costs. Understanding this distinction is crucial for realistic financial planning.
Manage
The last stage of the Value Maturity is Manage Value. It doesn’t come at the end of the process, but represents full maturity.
Managing value is an ongoing process throughout the business lifecycle, but it becomes most critical when exiting the business.
To achieve the highest value, you must manage your business, personal, and financial value.
An essential component of this stage is managing the wealth acquired from selling your business. Planning the path for this wealth in advance is crucial for future success.
The Value Maturity Index
The Value Maturity Index helps you assess your progress in each segment of value maturity. Rate each category from one to six, with six indicating full completion and one indicating no progress.
This scoring system, known as “Common Sense Scoring,” removes the option to rate your business as average. Complete this index every 90 days to track and highlight your value growth areas.
By following these Five Stages of Value Maturity, you can effectively grow and harvest your business’s value, to ensure long-term success and readiness for a future exit.
For more details, check out the original article on the Exit Planning Institute’s blog.
