CFO Insight LLC
Let’s assume that you anticipate selling the Company in 3 years. As you envision the Company, what will a potential buyer see?
Will they observe a quiet smoothly functioning Company that hasn’t expanded their market share or market presence in the past few years? Or will they see a strategic growth machine that seeks-out market opportunity, and executes to improve the long-term value of the Company?
In many middle-market companies owners concentrate exclusively on the present, and do well. But to improve strategic value, look beyond today. An example follows:
A capital goods manufacturer has a modest market share in the US market. Company growth is at U.S. market rate, so relative share has remained constant for many years. They provide service parts upon request; will respond to customer requests for on-site service, but don’t actively promote the service.
Certain components have a predictable useful life (e.g. a major gear assembly). Based on estimated average annual usage, the Company may expand its market by proactively developing a service-bulletin marketing program that after x-thousand hours of operation, preventive maintenance will avoid a line shutdown. The company may expand their normal service to provide:
Full-service to the equipment on site,
Provide a loaner unit so there is continuous production to avoid financial loss,
Full refurbishment of time critical parts on an annual maintenance program basis.
Initially this may require additional recordkeeping at the capital goods manufacturer, but could also result in incremental parts sales (assuming the customer company has a service staff), or additional service revenue. In many industries, after-market parts and service are more profitable than margins on the initial capital sale. Harvest those profits, and enhance your sales mix.
Market Opportunity: International Expansion
We mentioned that they had a relatively constant US market share. If the equipment is suitable, consider expanding the target market to include the International locations. Initially, this could include begin with export business through local distributors who could sell and service the equipment, could include Joint Venture, and perhaps even Partnerships. As the Company explores beyond the borders, is it possible that they also consider distributing non-competing products (developed by another manufacturer) in the US, since they have a solid presence in the US market?
The Internet Such makes such global expansion easier today than a decade ago.
International expansion may also be simplified by working with the US Commerce Department, which has become very aggressive to help US business expand internationally.
In each case, the strategic market can be expanded significantly while managing risk. In each case, a dollar of incremental profit may yield a multiplier effect when the business is sold three years hence, since one method of valuation considers an earnings multiple.
In either case, if the Company develops a reasonable plan, and effectively executes against the plan, the Company will be more marketable… more valuable.
Think beyond the ‘4-walls’ when considering the market, market growth and market share.