< PreviousA PROFESSIONAL DEVELOPMENT JOURNAL for the CONSULTING DISCIPLINES 30 MAY | JUNE 2019 t h e v a l u e e x a m i n e r PRACTICE MANAGEMENT Workplace Stress and Corporate Value: Is There a Link? By Nancy Neal Yeend, Dispute Management Strategist /////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////// /////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////// Stress is a significant and yet often hidden factor, which can negatively impact a business’s bottom line, stock prices, and its overall value. There is a direct link between stress in the workplace and rising healthcare costs. Also, stress contributes to increased absenteeism and lower productivity—all of which impact corporate worth. CONTEXT There is a story about a person giving a lecture who asked the audience a question as she held up a glass of water. “How much does this glass of water weigh?” The members of the audience shouted out several guesses, and the speaker responded, “It does not matter how much it weighs, but how long you have to hold it.” This analogy provides a good comparison when considering stress. It is not just the amount of stress, but how long a person is carrying it. Thinking about the glass of water, holding an eight-ounce glass for thirty seconds essentially has no negative impact; however, holding the glass for twelve hours can cause all kinds of problems. So too, carrying stress for a prolonged period has a significant impact on a person’s physical and mental health. According to one study, the work/life balance for eighty- seven percent of white-collar workers negatively impacts their health. “Seventy-five percent of employees consider their jobs” to be the major source of stress in their lives.1 It is the principal trigger of some significant health issues, can exacerbate existing health conditions, and according to Stanford professor Jeffrey Pfeffer, stress is a “silent killer.”2 Stress is linked to diabetes, heart attacks, stroke, and even some forms of cancer. The most common manifestations resulting from stress are headaches, tension, weight gain, and depression. 1 American Psychological Association, 2013. 2 Jeffrey Pfeffer, Dying For A Paycheck: How Modern Management Harms Employee Health And Company Performance And What We Can Do About It, HarperCollins, 2018. It is apparent that stress impacts employees and their performance, and as such, directly contributes to the success or failure of a company. Valuation analysts need to be aware of this hidden element, which can distort critical data. STRESS SOURCES Stress can be caused by several factors: insufficient information or training to effectively perform tasks, personality differences, lack of conflict prevention or dispute management skills or procedures, time pressures, unrealistic deadlines, productivity demands, etc. The causes can be numerous or single issue—each can have a significant impact producing dire consequences. Either way, stress generated in the workplace impacts not only a person’s overall health and wellbeing, but also an organization’s “bottom line” by reducing productivity, increasing absenteeism and turnover, and significantly escalating healthcare costs. Also, when stress is carried out of the workplace and into one’s personal life, the situation is compounded. Stress in an individual’s personal life can likewise be transferred to the office, and further increase the pressure felt by employees. Typical examples of stress generated from the home environment or in social relationships include, but are not limited to: financial issues, personality variables, psychological factors, and again, the list can be long and varied. UNDERSTANDING THE IMPACT Many factors cause stress in the workplace: long hours, unrealistic deadlines, job insecurity, heavy workload, the list is extensive; however, the number one stress factor appears to be change. It does not matter if it is as simple as moving a person’s desk to another location or pulling someone off a project, stress results. Between 2013 and 2017, various studies have estimated that stress costs American employers between 300 billion and 500 billion dollars annually.3 3 American Psychological Association, 2013. Dan Cook, 2017. Data originally published in Benefitspro.comA PROFESSIONAL DEVELOPMENT JOURNAL for the CONSULTING DISCIPLINES t h e v a l u e e x a m i n e r MAY | JUNE 2019 31 Mergers, acquisitions, and downsizing are major change events that cause significant amounts of stress. Stress on an individual in the workplace can also trigger interpersonal and organization issues, which, in turn, can cause more stress and impact more people. Stress can easily be compounded or magnified depending on the personality, resources, psychological status, and pre- existing health issues of the individual. For evaluation analysts, it is imperative to be aware of what is going on at all levels of the corporate structure. High levels of stress among employees are an indicator of a crack in the organization’s foundation, which can portent a significant financial impact on a business’s bottom line. In Chinese, the word for change is made up of two characters: opportunity and danger. It is true that some change is good, can improve how a person feels, and reduce an individual’s stress level. Companies provide memberships to gyms or have a facility on campus. They provide yoga lessons or mindfulness training. These employee benefits are becoming more widespread; however, if the root causes of stress are not dealt with, then the benefits that these other services offer cannot meet their full potential. Another noteworthy factor impacting stress is communication. In one survey, sixty-two percent of those responding said that the lack of communication was a major source of stress.4 It does not matter if it is missed communication, or just incomplete, the ability to effectively communicate can influence the amount of stress an individual experiences. With all the instant communication that technology provides, many communications are brief or truncated. This means people are placing their interpretation on a message, and further frustration can result. Little or poor communication leads to gossip and rumors, and ultimately to second- guessing and resentment. The results can be frustration and anger—both impact a corporation’s bottom line.5 SUGGESTIONS When reading about ways to create a healthy workplace, most articles focus on four things: exercise, healthy eating habits, stopping smoking, and regular checkups. Of course, these are fundamental considerations when looking at ways to keep people healthy. The benefit provided by focusing on these 4 About.com survey conducted in 2014. 5 According to The American Institute of Stress, America has the highest workplace violence rate in the world where, on average, “20 workers are murdered each week.” health-enhancing factors is significant; however, they will produce even better results if people can eliminate the source of their stress. Some of the direct actions an employee can take to reduce the negative impact of stress are to use all vacation days, be sure to take breaks during the day, leave the office at a “reasonable” hour, do not remain connected to the office via phone, text or e-mail, and increase social relationships. The question that needs to be asked is, “Are employees able to do any of these things?” If the answer is “no,” then a valuation analyst may need to take a closer look at the work environment. When considering how to minimize the negative impact of change, four strategies must be considered: plan, include all stakeholders, be open to differing points of view, and add extra time for implementation. Planning and attempting to anticipate everything that can go wrong will help implementation of the change to go more smoothly. Another technique is to encourage people to view change as an opportunity rather than a threat. This reframing technique helps minimize resistance to the proposed change. Although not admitted, feeling important is a basic human need, and so including all the stakeholders during the planning phase, especially ones with divergent ideas, will help reduce resistance to the change, and will go a long way to reduce stress. This inclusion makes people feel that they are not just subject to upper management’s whims but are part of the architectural team. As someone once said, “The bones of failed changes litter the desert of dry communications.” Being sure that communication is complete and not ambiguous is a major factor when considering how to reduce stress. One survey found that forty- three percent of companies, which had a drop in stock value, also suffered from poor internal communication. Only using e-mail or texting can create unnecessary problems and magnify stress. Face-to-face meetings and frequent video conferencing does two things: people can get clarification and thus the destructive “rumor mill” is minimized, and the entire message is communicated. Only seven percent of a communication is the words spoken: ninety-three percent is tone inflection, eye movement, and body language. That is why “seeing” as well as “hearing” the communication improves the overall understanding of the message. Again, this reduces resistance, but more importantly, reduces stress. A PROFESSIONAL DEVELOPMENT JOURNAL for the CONSULTING DISCIPLINES 32 MAY | JUNE 2019 t h e v a l u e e x a m i n e r IMPACT ON VALUE Armed with this background, a valuation analyst can ask better probative questions, can appreciate the significance of seeing a spike in healthcare costs or absenteeism, or a reduction in productivity. Increased “turnover” rates are another subtle but significant indicator of problems within the organization. When people leave an organization within relatively short periods, it is not only costly for the company to train the next person but also it suggests that there are significant underlying management issues, which may hurt the organizations continued success or survival. When stress indicators are not recognized, it is possible that critical mistakes can be made concerning analyzing the value of a business, stock, even the probability of the company remaining profitable, or for that matter, surviving in a competitive world. Remembering that lost work time due to stress costs American companies hundreds of billions of dollars annually is important. Analysts who are aware of the impact that change and communication have on the workplace and the potential for negatively influencing corporate worth will be in a better position to accurately determine value. Nancy Neal Yeend is an experienced, nationally recognized dispute management strategist and mediator handling civil cases for nearly thirty years. She serves on three Appellate Mediation Panels and has served as a faculty member at the National Judicial College for twenty years. She co-founded Silicon Valley Mediation Group in Los Altos, CA. VE The Value Examiner®—May/June 2016 CPE Exam Office Use Only: Invoice #: Examiner CPE Rev 7/14/16–Page 1 Earn five hours of NACVA CPE*by reading The Value Examiner and For CPE credit, scan and e-mail to: (801) 486-7500, or mail to: 5217 South , UT 84107 Member cost: $76.50 (Non-Member cost: $85.00) Name: Designations: NACVA Member #: Firm Name: IBA Member #: Address: City: State: ZIP: Tel: Fax: E-mail: Check #: (payable to: NACVA) or VISA MasterCard AMEX Discover Diners Club Credit/Debit Card #: Expiration Date: Credit card billing address: Same, or Address: City: State: ZIP: Authorized Signature‡ Date: ‡By signing, you authorize the National Association of Certified Valuators and Analysts (NACVA) to charge your account for the amount indicated. NACVA can also initiate in the event a credit or correction is due. Your signature authorizes NACVA to confirm the use either for future communication. NACVA will not disclose or share this information * This exam does not qualify for NASBA QAS CPE credit. Important note: Although this exam qualifies for NACVA CPE, it may not be accepted by all state boards or accrediting organizations. Therefore, individuals should contact their state board or accrediting to determine if passing an exam after reading a book/magazine meets their CPE State CPE Sponsor #:_______________. Does the IPCPL Make Sense (Part II) By Richard R. Conn, CMA, MBA, CPA, ABV, ERP 1. The IPCPL methodology is founded upon the premise that there is a direct inverse relationship between the firm size (i.e., Enterprise Value) and cost of capital—the smaller the firm, the higher its risk rate. In Part II of his continuing argument against IPCPL, Conn takes the position that:a. He agrees with the premise b. He disagrees with the premise c. He offers no comments either in support of or against the concept 2. BB&D and Gorshunov are really saying both that smaller EV firms have higher costs of capital and that there is a direct correlation between firm EV and its revenues (e.g., smaller firms have lower revenues). However, Conn’s regressions of the actual IPCPL data has led him to conclude that: a. There is a very strong inverse correlation between firm EV and its cost of capital (i.e., smaller EV firms have higher risk rates) b. There is a very strong direct correlation between firm revenues and EV size (i.e., firms with higher revenues have greater EV’s than firms with lower revenues) c. There is no correlation between firm EV and its cost of capital and, at best, only very weak correlation between firm revenues and EV size d. High degrees of correlation is not necessarily an indication of causality The Value Examiner ®—March/April 2016 CPE Exam Office Use Only: Invoice #: Examiner CPE Rev 5/4/16–Page 1 Earn five hours of NACVA CPE* by reading The and completing this exam. For CPE credit, scan and e-mail to: (801) 486-7500, or mail to: 5217 South State Street, Suite 400, 84107 Member cost: $76.50 (Non-Member cost: $85.00) Name: Designations: NACVA Member #: Firm Name: IBA Member #: Address: City: State: ZIP: Tel: Fax: E-mail: Check #: (payable to: NACVA) or VISA MasterCard AMEX Discover Diners Club Credit/Debit Card #: Expiration Date: Credit card billing address: Same, or Address: City: State: ZIP: Authorized Signature‡ Date: ‡By signing, you authorize the National Association of Certified Valuators and Analysts (NACVA) to charge your account for the amount indicated. NACVA can also initiate credit entries to your account in the event a credit or correction is due. Your signature authorizes NACVA to confirm the above information via e-mail and/or fax and to use either for future communication. NACVA will not disclose or share this information with third parties. * This exam does not qualify for NASBA QAS CPE credit. Important note: Although this exam qualifies for NACVA CPE, it may not be accepted by all state boards or accrediting organizations. Therefore, individuals should contact their state board or accrediting organization to determine if passing an exam after reading a book/magazine meets their CPE requirements. State CPE Sponsor #:______________ _. A New Era for Fair Market Value Physician Compensation By Mark O. Dietrich, CPA, ABV 1. Appraisal practice and government enforcement surveys have been employed as a “gold standard” in measuring fair market value for physician compensation for many years. In this article, the author makes the case that this measurement: a. Is the most efficient and accurate way to measure FMV for physician compensation b. Is based on a series of critically flawed beliefs amongst many regulators and appraisers c. Is flawed, but still useful d. None of the above 2. Regarding the question whether or not all physicians will soon be employed by hospitals, the author suggests: to single specialty physicians in private practice considering are the chief employer of specialty physicians in private practice c. Survey data does not exist to support either conclusion d. More research needs to be done to establish specialty physicians considering private practice The Value Examiner ®—July/August 2016 CPE Exam Office Use Only: Invoice #: Examiner CPE Rev 8/31/16–Page 1 Earn five hours of NACVA CPE* by reading The Value Examiner and completing this exam. For CPE credit, scan and e-mail to: fax to: (801) 486-7500; or mail to: 5217 South State Street, Suite 400, Salt Lake City, UT 84107 Member cost: $76.50 (Non-Member cost: $85.00) Announcing—The Value Examiner CPE exam can now be taken online! Visit the exam. There, you will be able to purchase, complete, and earn five hours of NACVA CPE*. You will instantly receive a certificate of completion for each exam you pass. Name: Designations: NACVA Member #: Firm Name: IBA Member #: Address: City: State: ZIP: Tel: Fax: E-mail: Check #: (payable to: NACVA) or VISA MasterCard AMEX Discover Credit/Debit Card #: Expiration Date: Credit card billing address: Same, or Address: City: State: ZIP: Authorized Signature‡ Date: ‡By signing, you authorize the National Association of Certified Valuators and Analysts (NACVA) to charge your account for the amount indicated. NACVA can also initiate credit entries to your account in the event a credit or correction is due. Your signature authorizes NACVA to confirm the above information via e-mail and/or fax and to use either for future communication. NACVA will not disclose or share this information with third parties. * This exam does not qualify for NASBA QAS CPE credit. Important note: Although this exam qualifies for NACVA CPE, it may not be accepted by all state boards or accrediting organizations. Therefore, individuals should contact their state board or accrediting organization to determine if passing an exam after reading a book/magazine meets their CPE requirements. State CPE Sponsor #:_______________. How the New Leases Standard May Impact Business Valuations By Judith H. O’Dell, CPA, CVA 1. The new leases standard will be effective for private companies in: a.Fiscal years beginning after December 15, 2018 b. It is in effect now c. Fiscal years beginning after December 15, 2019 d. December 15, 2019 2. A lease is classified as a finance lease if: a. It transfers ownership of the underlying asset to the lessee by the end of the lease term b. The lease term is for the major part of the remaining economic life of the underlying asset c.The underlying asset is of such a specialized nature that it is expected to have no alternative use to the lessor at the end of the lease term d. All of the above 3. After the effective date of the standard, the initial accounting by a lessee for a new lease is: a. Recognition of a lease liability at the present value of the lease payments discounted using the LIBOR rate and a right of use asset equal to lease liability b. Recognition of the right of use asset as the total cost of the lease and a lease liability in the same amount. c. Recognition of a lease liability at the present value of the lease payments discounted using the discount rate for the lease and a right of use asset equal to the lease liability d. Recognition of an asset equal to the value of item leased and a like liability Visit and log in to access an exam. Online exams are available for The Value Examiner issues from 2014 to current. You will be able to purchase, complete, and earn five hours of NACVA CPE* for each exam. You will instantly receive a certificate of completion for each exam you pass. Earn CPE Online by Reading The Value Examiner®! * This exam does not qualify for NASBA QAS CPE credit. Individuals should contact their state board or accrediting organization to determine requirements for acceptance of CPE credit. To learn more, please visit The Value Examiner CPE exam can now be taken online! CPEexamVEad.indd 110/11/16 1:01 PMA PROFESSIONAL DEVELOPMENT JOURNAL for the CONSULTING DISCIPLINES t h e v a l u e e x a m i n e r MAY | JUNE 2019 33 PRACTICE MANAGEMENT Telling Your Story: Editorial Board Members and Contributors to The Value Examiner Say Why They Write (Part II of II) Compiled by Nancy McCarthy, Senior Editor, The Value Examiner /////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////// /////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////// Writing weekly blogs for both corporate web sites, books, and articles helps to keep me and my firm in the public light, which helps drive clients to both of my entities and has required me to bring on additional staff. My business is to help clients resolve issues with the IRS, business to business and within businesses on valuation and other matters. The Collaboration Effect focus on speaking engagements as a keynote, workshop, executive forum, and seminar speaker. Being visible in various venues drives traffic to the two web sites and, in turn, drives clients to inquire for assistance. In today’s world one-on-one marketing still works best, but with limited time, writing and social media are the wave of the future. Michael (Mike) A. Gregory, CVA, ASA, MBA, Qualified Mediator with the Minnesota Supreme Court founder of Michael Gregory Consulting, LLC, and The Collaboration Effect The reason that I write has changed over the years. At first it was pure marketing; I was just starting out and needed clients to call me, and writing was cheaper than advertising. Later, as I started working on cases that required me to qualify as an expert at trial, being published helped towards that goal. Now I write because I enjoy it. I have been doing this long enough that I have knowledge and experience that I realize is valued by others, and I enjoy sharing it. Michael Goldman, MBA, CPA, CVA, CFE, CFF, Principal, Michael Goldman & Associates, LLC There are many nuances to applying accounting standards, and valuation analysts come from backgrounds other than accounting. I was involved in the accounting standard-setting process during my career as a volunteer on AICPA technical committees and as Chair of FASB’s Private Company Financial Reporting Committee. My practice is now limited to business valuation and litigation support services, but I stay current on FASB activities. As the accounting standards are changed (revenue recognition and leases), clarified, or allow private company alternatives, GAAP financial statements may not be not comparative over the five year period we typically use in performing valuations. Articles I have written for The Value Examiner and my website attempt to explain the accounting changes and alert practitioners to the impact they have on business valuations. I stress the importance of reading footnotes and carefully analyzing comparables. Judith H. O’Dell, CPA, CVA, President, O’Dell Valuation Consulting LLC CPA Kindra Hall, a motivational speaker and one of the keynotes at the 2019 NACVA and the CTI's Annual Consultants' Conference presented a unique topic: “The Power of Storytelling on Your Journey to the Top.” In the last issue of The Value Examiner, contributors and board members gave insights into why they write. In this issue, we hear from several more professionals who write as part of their business life. Continued on page 41A PROFESSIONAL DEVELOPMENT JOURNAL for the CONSULTING DISCIPLINES 34 MAY | JUNE 2019 t h e v a l u e e x a m i n e r PRACTICE MANAGEMENT Growing Revenues vs. Growing Equity Value: Learning the Differences By George Sandman, President, CoreValue* /////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////// /////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////// Understanding the CEO’s goal is the predicate for planning an engagement since a plan without a goal is a voyage without a destination.1 Goals drive strategy. So, when a CEO says that they want to grow, what do they mean? The top three advisory goals2 reported by CEOs are: Goal 1: Grow (fifty-nine percent of clients want to increase revenues and profits) Goal 2: Strengthen Operations (twenty percent want to make the company easier to run) Goal 3: Prepare to Sell My Company (nineteen percent want equity planning or to prepare for M&A due diligence) Word to the wise: "Grow" and "Prepare" to Sell are both “growth” engagements. Why? The first CEO wants to grow revenues; the other wants to grow equity value. Further, according to data from Pinnacle Equity Solutions2, eighty- three percent of “Prepare to Sell” CEOs need to grow revenues to create the equity value they need to fund their personal wealth plans. Meaning, they set out to sell their company and end up needing to grow it. Inescapable conclusion: most clients want/need planning engagements that deliver revenue growth. While growing revenues grow equity value, the reverse does *This article initially appeared as Part I of III of the blog on Mr. Sandman’s website in April 2019. It has been adapted and modified by Mr. Sandman for readers of The Value Examiner. 1 “Chapter 2: Developing a Strategy.” Harvard Business Review Leader’s Handbook: Make an Impact, Inspire Your Organization, and Get to the next Level, by Ronald N. Ashkenas and Brook Manville, Harvard Business Review Press, 2019. 2 Courtesy Pinnacle Equity Solutions, results of Business Exit Readiness Index™ surveys performed by Certified Business Exit Consultants with owners of ~2,000 middle market companies. ©2016-2019 Pinnacle Equity Solutions, Inc. not apply; nor is equity value growth dependent on revenue growth. • Equity value growth can be risk mitigation: “Here are the due diligence holes to fill to increase the existing value you can harvest;” this is transaction-centric planning •Revenue growth is strategic planning and execution: “Do X, Y, and Z and revenues will increase;” this is strategy- centric planning They overlap, but only slightly. This article discusses growth planning or being the architect. Bear in mind the plan will then be turned into reality— generally with the help of a trusted advisor acting as a general contractor. The architect and general contractor (GC) can be the same person. The GC helps to manage plan execution, collaborating with the internal executive team and outside experts, as needed. The architect role is strategic; the GC role, similar to the CEO role, combines strategy and tactical execution. PLANNING GROWTH The growth plan is the advisor’s deliverable. The first step in developing the growth plan is performing a comprehensive analysis3 of the client company. Two key questions must be answered: (1) how well does the company understand and manage market factors, and (2) how strong are the company’s operations? Understanding the market and operational factors sets the baseline form, which the advisor can develop comprehensive growth planning. 3 See NACVA CEO Parnell Black’s letter to Members 1Q2019, published April 8, 2019: A PROFESSIONAL DEVELOPMENT JOURNAL for the CONSULTING DISCIPLINES t h e v a l u e e x a m i n e r MAY | JUNE 2019 35 CHART 1: PRIVATE BUSINESS STANDARDS OR OPERATIONAL BEST PRACTICES4 4 Courtesy CoreValue® GrowthThe company has a history of consistent growth greater than its competitors, coupled with projected, future revenue growth above the market’s rate. Market SizeThe market supports significant growth of the business. Market ShareThe company owns the highest percentage of the available market relative to its competitors. Recurring RevenueThe company can rely on a portion of future revenue from contractually committed customers. Barriers to EntryThere are significant obstacles facing a new entrant into your company’s market. Product DifferentiationThe company has a product/service with unique characteristics that provide a competitive advantage. BrandThe company has a recognizable brand that reinforces the business’ presence in the marketplace and supports the company’s objectives. MarginThe company enjoys gross and net margins greater than the industry norm. Customer DiversificationThe company has a well-diversified customer base. Company OverviewAn outsider can easily obtain a holistic understanding of the company, including: the company’s performance, practices, culture, discipline, and mission. FinancialAll of the company’s financial matters are in order and they follow best practices. Sales and MarketingThe company can produce revenue in a proven and systematic way, ensuring the business is sustainable and not simply based on the efforts of individuals within the business today. OperationsThe company has the ability to deliver on the sales promises made to the marketplace and to do it in a systematic and process-driven manner. Customer SatisfactionThe company tracks and uses key measures to meet customer expectations at all levels. Management TeamThe compnay has a leadership team/individual in place to realize the company’s vision and mission while helping the shareholders achieve their objectives. HRThe company has the ability to find, develop, and retain quality individuals that enables success in all aspects of the business. LegalAll of the company’s legal matters in order, documented, and the company follows best practices. InnovationThe company understands that innovaiton is invaluable to creating an ongoing competitive advantage; it has a proven and systematic way to drive innovation. Operational Drivers (forces inside the company) Market Drivers (forces outside the company) 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18A PROFESSIONAL DEVELOPMENT JOURNAL for the CONSULTING DISCIPLINES 36 MAY | JUNE 2019 t h e v a l u e e x a m i n e r When planning to grow equity value, the holistic methodology shows clients the links between operations and company-specific risks. By creating a plan to reduce these risks, advisors can help clients increase equity value without increasing revenues. This planning mitigates risks. When planning to grow revenues, a standard methodology facilitates the collaboration of expertise around common goals. The above-referenced analysis rates how the company’s processes and procedures compare to private business standards. Private business standards are value drivers— think of the value drivers as the gears in the business engine; the output of the engine is revenue and profit. Strengthening the engine increases revenue outputs. Simultaneously, this reduces risk—the client is, therefore, double-dipping revenues and value, increasing both earnings and the multiple applied to them. Revenue and equity growth planning engagements share these common steps: 1. Identifying the client’s goal 2. Analyzing the client company value drivers 3. Prioritizing the value drivers using the client’s goal for guidance 4. Preparing a plan to strengthen the priority value drivers; this plan is the deliverable With the client’s goal in hand and the strength of the value drivers analyzed and understood, the business advisor applies her expertise, creating a plan that prioritizes the strengthening of select value drivers. When creating the client plan, strong value drivers need to be documented; weak value drivers need to be improved and documented. For example, “growing revenues” depends on a strong value driver for selling into a large potential market. If a large market exists, the plan will document this fact; if the company needs to increase the size of the market it reaches to grow, action is required. Let’s unpack the planning process using the Toplift Services PLLC case. Toplift Services is a professional services firm. Toplift’s industry is undergoing significant consolidation, and Toplift’s shareholders want strength in the market. Toplift is still being buffeted by the after-effects of the Great Recession. Although they are generating acceptable per-employee revenues, they are competing on price (rather than value), resulting in net revenues below the industry norm. Toplift’s gross annual revenues are ten million dollars. Toplift’s new CEO, Elizabeth Smith, has defined her goal as increasing net revenues from $500 thousand to a two million dollar run rate within eighteen months. The analysis of Toplift’s value drivers is summarized in Chart 2. CHART 2: TOPLIFT OVERVIEW, ENTERPRISE VALUE, AND OPERATIONAL RATING The business advisor, meeting with the CEO, will have completed the analysis of Toplift’s operations. This analysis creates a comprehensive understanding of the totality of the company’s market and operational areas. The business advisor will use this understanding when creating Toplift’s plan. A PROFESSIONAL DEVELOPMENT JOURNAL for the CONSULTING DISCIPLINES t h e v a l u e e x a m i n e r MAY | JUNE 2019 37 CHART 3: EXAMPLE OF VALUE DRIVER ANALYSIS The above chart is an example of the type of information the advisor will need to set a baseline for planning. Here we see that there are six facets to understanding the strength of Sales and Marketing. Toplift has an effective marketing process, run by their Director of Marketing, with a 10 of 10 rating. Toplift is using engagement agreements with all of its clients (Rating 10 of 10), and the firm uses clear metrics to measure marketing performance (Rating 10 of 10). However, the firm professionals are also the de-facto sales force and only have general sales objectives (Rating 3 of 10). Further, they are operating without a sales plan or standardized process (Rating 0.6 of 10). Converting leads into paying clients—and thereby growing gross revenues—requires strong (10-10) performance in all areas. GROWING REVENUES VS. GROWING EQUITY VALUE We will start by discussing the value drivers and their priorities in line with the goal “Grow Revenues.” We will then contrast the priorities against a “Grow Equity Value” engagement. The value drivers have different levels of priority, determined by the CEO’s goal. Each of the value drivers is therefore designated as lower priority, priority, or high priority. Note lower, not low. A PROFESSIONAL DEVELOPMENT JOURNAL for the CONSULTING DISCIPLINES 38 MAY | JUNE 2019 t h e v a l u e e x a m i n e r CHART 4: RELATIVE PRIORITY OF VALUE DRIVERS BY ENGAGEMENT GOAL Value Drivers relative engagement complexity: Growing revenues is more complex than growing equity value. Growing Revenues: •9 high priority •7 priority •2 lower priority Growing Equity Value: •5 high priority •11 priority •2 lower priority GOAL 1: GROWING REVENUES The first question is whether Toplift can reach their net revenue goal at today’s gross revenues. Related, at the eighteen month mark, can Toplift increase net revenues from five percent to twenty percent while creating an organization that is healthy and thriving? Here is a golf analogy: if the company stops swinging the club when it arrives at the ball, i.e., creates a plan to get to the goal and no further, the plan could call for cutting costs to arrive at the goal. A plan to cut costs is a slash and burn approach, a P&L sleight of hand. Toplift will reach the goal on their way to oblivion. To drive from the tee to the green, the company needs to be swinging through the ball, driving through the objective with power to spare. Slashing is easy, planning less so. Commitment, speed, and the focus on profit give this engagement a high level of complexity. This complexity begs for careful planning. Planning considers both the capital and expertise needed to execute the growth plan and reach the goal. While clients might normally assume that planning is a “nice to have” rather than required; in fact, growth planning ensures that time, treasure, and expertise are deployed efficiently, minimizing investment by guarding against waste. Growth planning contributes to maximizing the project’s ROI.A PROFESSIONAL DEVELOPMENT JOURNAL for the CONSULTING DISCIPLINES t h e v a l u e e x a m i n e r MAY | JUNE 2019 39 Before we turn to the value drivers, one must answer this question: can the client afford the growth needed to hit the revenue goal within the specified time frame? By planning how the client company will fund the growth plan—from cash reserves, organic income, or outside funding—the business advisor is providing a critical service. There is a formula for calculating the rate of growth the client’s organic cash can fund.5 This analysis is a predicate to revenue growth planning. Chart 5 demonstrates the relative priority of the value drivers based on the goal “Grow Revenues.” This prioritization is not Toplift-specific; it is determined by the goal itself. 5 For a related article, please visit knowledge/how-fast-can-your-company-afford-to-grow Growth planning ensures that time, treasure, and expertise are deployed efficiently, minimizing the client's investment by guarding against waste. This contributes to maximizing the project's ROI. CHART 5: RELATIVE PRIORITY OF VALUE DRIVERS FOR “GROW REVENUES” ENGAGEMENTNext >