4:00 AM 28th December 2021
What Is ‘Strategic Value’ And How Do You Measure It?
If you are thinking of diversifying into new market sectors or even going international a good place to start may be by acquisition of a business that is comfortable in that market and giving you a stable base for market entry.
Tapping into new sectors and markets can increase your customer base, new sectors and markets can drive higher profit margins. It can help your business grow at a faster rate and drives new ideas and innovation ensuring you stay ahead of the competition.
A more diverse business model can in spreads your risk, helping you manage changes in demand or market conditions.
A financial valuation might include an analysis of the company's management, its capital structure, its future earnings prospects or the market value of its assets. Common approaches to business valuation include a review of financial statements, discounting cash flow models and similar company comparisons.
Strategic value is the value a purchaser is willing to pay for a business, over and above what an impartial business valuer might determine is ‘fair market value.’
If you want to measure the strategic value of an opportunity you need to answer some of the following questions:
Image: Mohamed Hassan / Pixabay
How attractive is the market segment or overseas market? Ask yourself the following questions and don’t move until you are confident you have the right answers:
Materiality and profit potential
The market has meaningful a revenue pool today and high future profit potential
Existing companies have done it and made money
Acquisitions which are already operating at break even and greenfield investments which can achieve break even in a reasonable timeframe are considered attractive
Market has clear and sustainable growth drivers
Existing market structure is likely to support a return on capital greater than the cost of capital
Is there a strategic fit? Research and analyse so that you have high confidence that the business opportunity is consistent with your purpose, values and ambitions:
Fit with business aspirations
Market meets a clear customer need
The opportunity deepens engagement and strengthens partner relationships with customers, as well as creating new customers and extending our relevance beyond today’s customers
Market entry strengthens our business expertise
Entry will leverage existing capabilities (skills, resources, expertise)
Target products and services which build on or expand our current expertise
Leverages our brand (and customers can see the brand fit)
Increases our influence over the drivers of sector cost
Segment and knowledge is relevant to multiple Business geographies
Once you are confident that there is an attractive market and everything fits your strategy there’s one more hurdle to cross. You could ask yourself “is the deal ‘doable’?”
Check the following and, if all the stars align, you are ready to pursue a new market opportunity.
Targets/partners are available in the market
Acquisitions are considered the most attractive growth option
Joint-ventures may be considered on a case-by-case basis
Does not require changing institutional behaviours
Any need to change behaviour among certain members along the value chain is considered unattractive
Interest from the business and senior executive passion
Potential acquisitions which garner the support of senior sponsors are attractive
Don’t let all this scare you or put you off but many businesses have jumped in before they are ready and regretted it. If you do your homework your chances of success are enhanced.
Let’s finish on a relevant quote from Warren Buffett, the American business magnate, investor, and philanthropist.:
"Price is what you pay. Value is what you get."
Ian Garner is a retired Fellow of the Chartered Management Institute (FCMI) and a Fellow of the Institute of Directors (FIoD). He is Vice Chair of the Institute of Directors, North Yorkshire Branch. https://www.iod.com/events-community/regions/yorkshire-north-east
He is founder and director at Practical Solutions Management, a strategic consultancy practice and skilled in developing strategy and providing strategic direction, specialising in business growth and leadership.