VITAL MGMT's Thesis on Enterprise Value
= What Your Company Is Worth To You in the next 10 years; 2028
In today’s issue…
Creating Enterprise Value
545 words, total reading time 4 minutes
For years now, CI companies have been operating in a very fragmented, even isolated marketplace and making relatively decent income doing it. Over 2800 such companies belong to CEDIA and an estimated 6,000+ participate in selling AV and home automation equipment and providing installation services.
VITAL MGMT Has studied over 300 such companies over the past 13 years and more recently since 2014 has zeroed in on what potential these companies have. Potential for making profit, accumulating cash and building value that can be monetized.
While our focus has been companies from 12 employees to 50, we believe the concepts learned can be applied to virtually every CI business in a significant market.
Of course, we recognize diversification and difference has been the evolved standards of our times. Few, if any, companies embrace a single way of doing things. We also know CI businesses are fundamentally local businesses with local clientele and relationships that are the keys to their success. It’s the local partner relationships and evergreen nature of those referrals that make the business so attractive to begin with.
However, there is prosperity in doing things the same way. Counting the same way; using benchmarks, metrics and guidance based on the same data. Collaboration with others results in better processes and systems and ways of doing business.
In brief this is what we have observed:
Counting the same way allows realistic performance range achievement.
Using key metrics reveals the weaknesses that need to be strengthened in any business.
Understanding profit math helps managers simplify their priorities
Managing Cash effectively and understanding what is yours drives long-term health and well-being of the business.
Creating a financial outlet for companies to partially liquidate and build additional value gives owners a true ability to cash out.
Efficiencies are realized with scale and critical mass is most often not found locally in small organizations.
So what is possible?
We consistently see 20% to 25% net operating profits levels. We see companies accumulating cash and building equity.
We see conformity in revenue recognition, project management, billing practices, payment requesting, inventory management, compensation resulting in records achievement for company’s following the system.
So why don’t more companies take advantage of this know-how?
Many believe they are at their peak performance and precious little can be gained. Others are mired in the busy day-to-day to zoom out and commit to making changes. Others are in the middle of rescuing their businesses. While far too many others are just comfortable riding the waves because change is hard work.
So how much enterprise value can be created and what might you be missing out on?
Modestly profitable CI companies making 7% who plan to sell their businesses 5 to 10 years out; might have a 10 year value string (profit & sale value) of one times their current revenue. The assumption is every owner draws a replacement salary separately in both cases.
A performance based company reaching the 20% net profit level and using the reinvestment strategy could realize 3.6 to 4.0 times its current revenue run rate. We consistently model this for our clients.
Of course, each of these is hypothetical and many will not achieve even the one time value in the ten years. However, most could remain gainfully employed in the business. The stark reality is a significant difference in monetization remains. Getting process compliant and proactively managing to metrics (dashboards) is the minimum starting point.
We hope you will consider investing and re-investing in the future of your company. It's Vital.