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Unleashing Hidden Value – Think Like a PE Firm

by on June 25, 2014

Hidden Value

Hidden value, defined as value that can be liberated within a financial quarter or two with little to no effort, exists in most every business and comes in a lot of different forms.

Private equity (PE) firms know this.  They’ve raised millions of dollars and are actively buying companies so they can do exactly that – unleash hidden value.

Make some small tweaks and increase value.

There are a lot businesses where an experienced eye, using a lot of database work and analysis, can identify three or four minor adjustments that can be made inside of a quarter for almost no money and increase EBITDA by 30%.

They’re kind of like chiropractic adjustments where you make several small tweaks to get maximum change and relief.

Every dollar of EBITDA added to the bottom line is worth five or more dollars to investors in enterprise value. Working capital efficiency has direct affect on EBITDA. Therefore, maximum return on working capital is a key lever to increasing enterprise value.

This activity allows the CEO to see the company the way a PE firm would and enable the ability to make changes so that the company can be sold for a premium.

However CEOs are typically optimists, they believe that the big sale, the fast growth, the new product  “is just about to happen.”  As a result CEOs typically think they’re worth more than they actually are.

When do they start to take notice?

When bonuses aren’t getting paid.

When there’s a high rate of employee turnover and they’re losing a lot of good people.

At this point the CEO has to make invest in vehicles to raise the company’s profile, maybe change the way revenue is generated.

But how is that determined?

It’s a question of return on capital.

Before any additional new capital is invested toward growth, it’s important to ensure that return on working capital already invested has been maximized. After all, the cheapest form of capital is internally generated cash flow.

Every business activity within a company has a discrete investment (expenses) and a discrete return associated with it. Comparing working capital deployed to an activity with the contribution margin it produces gives the yield for each activity. These individual yields cumulatively create the return on the company itself, and usually reveal significant opportunities to reallocate working capital and create EBITDA gains.

It’s a matter of identifying any discrepancy between working capital allocated to an activity and its financial returns.  Then reallocating working capital based on yields.  Reallocate to activities with higher returns, and reduction of expenses on activities that produce lower returns.  This improves EBITDA and many of these changes can happen within 1 or 2 quarters.

Private equity looks at HOW a company operates because it knows that will have a huge impact on how well it performs.


If you’re wondering how you build a company that you can sell for a premium in a few years, contact me to discuss the Valuation Amplification Process.

I also invite you to download the white paper and learn the 5 step process on How to Quickly Increase Your Valuation: a Proven 5 Step Process.

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