Using Data to Drive Valuation

Using Data to Drive Valuation

In certain markets, valuations are viewed with more speculation based on the client assets.  All buyers will create a set of models that are “bracketed” within these general boundaries:

  1. “As is” model.  This is a straight view of the standard ratios based on the historical performance of the business.  In theory, this boundary is the line of demarcation relative to a conservative view of the asset, ie the model based on absolute reality.
  2. “Synergy model”.  This is where things get interesting.  Most buyers will develop a view/model that places the target asset within the buyer’s environment.  The possibilities are endless here and the most important thing to remember is that every buyer will see things differently when creating this model.

Let’s focus on the synergy model for a moment and perhaps look at one potential facet in depth.

So, we know that buyers are willing to move the valuation needle toward the synergy model results in a sellers’ market.  Agreed.  How much is obviously based on each unique situation.  However, every seller has the opportunity to utilize seller’s diligence to feature and leverage its unique fit within the buyer’s world.  This is hard work and requires a bit of a “turn of the tables” during every step of the process, but significantly important to optimizing seller’s value.

The most important raw material to utilize is data, but NOT just raw data.  Raw data is analogous to a big block of granite to a sculptor – essential, but only to commence the work to create something expressive, meaningful, and valuable.   The key is to take that raw material and display it in a way that is appealing and compelling within the eyes of the buyer.  Only in that format will a buyer be able to justify moving the valuation needle in the seller’s direction.

Let’s focus on just one element – client retention and its impact.  We can choose a multitude of stratifications (data display) that justify our negotiating position such as:

  • Year over year specific client attainment, renewal, profitability, and attrition stratifications such as:
    • Historical year comparison of the above
    • Origin of GP for each year/client
    • Origin of client attainment:  internal sales, outside entities
    • Attrition attributes including self-selection
    • GP trend for each client/year: +/- or =, X percent delta.
    • ETC

The possibilities are endless.  The goal is to display growth, client stability and opportunity.

Lets focus on buyer synergy relating to GP opportunity within the backdrop of client retention and optimization:

Why does it matter? The math is simple:

  • It’s 6-7 times less costly to sell to an existing client than to win a new one
  • Selling to current clients has a 70% win-ratio compared to a 20% win-ratio for new clients
  • Increasing customer retention by 5% can increase profits anywhere from 25% to 95%

So, what can we do today to prepare for an eventual display that may enhance our valuation:

Here are 5 key elements of a best-in-class client experience process:

  1. Customer Feedback.Everything starts and ends with customer insight and feedback. Understanding and analyzing what your clients’ value will provide a powerful framework for making strategic business decisions, prioritizing projects, and allocating resources so you can continue to add value over time and changing priorities. Gathering honest, consistent feedback and benchmarking is best achieved through a third party. Implementing Voice of the Customer and Client Advisory Committees for deep insights from your most valuable clients coupled with NPS to gather trends, perceptions and insights across your entire client base is an easy and effective way to know how best to meet customers’ needs and wants today & in the future.
  2. Client Segmentation.Not all customers are created equal. Applying the right effort and resources to the right clients delivers the highest client experience. We all have 525,600 minutes in a year. High growth organizations understand this and use their resources and time wisely. Use customer and financial segmentation models to capitalize on your largest opportunities for innovation and growth. Understand where effort exceeds margin and improve processes rather than lose a client. Meet your customers where they want to be met.
  3. Standardized Account Management Tools and Training: Your sales teams have thetraining and tools to plan and think strategically, measure and reduce risk, and advance their client relationships. You can systematically identify revenue risk and then build a step-by-step action plan, ensuring that they are focused on those activities that will ultimately maximize the potential of each and every client relationship to become and remain as trusted advisors.
  4. Performance Reporting.A framework and 100% execution on alignment with clients’ annual strategies and assigning accountability and ownership for outcomes.​ Standardizing an approach to capture and discuss strategy and performance against strategic initiatives through quarterly business reviews with key executives.
  5. A Client-centric Culture. Leadership meetings have client discussions on every agenda. The CEO and all Senior executives are connected to key clients as executive sponsors. Rewards and recognition are given to those who impact high NPS and high retention numbers.

We can prepare for an M&A process by getting operational.   Client retention serves us well – it yields immediate results and increases the value of our asset which is a key area of buyer interest…and really should be called “client opportunity” within an M&A process.  If we are performing well relative to our one true asset (clients), the raw data can be displayed as a beautiful work of art.  After all, beauty is in the eye of the beholder!  In addition, keep this quote in mind:

“If you really look closely, most overnight successes took a long time.” – Steve Jobs

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