Most business owners spend the majority of their time focused on making profits. The common belief is that value is a function of earnings. In the past, this has been true. However, in our fast-paced global company, the value of a business is increasingly based on the economic synergies it can provide to a corporate buyer. Smart business owners today know that their companies can be worth much more if they turbocharge their value by aligning themselves with potential strategic buyers.

Modern businesses are fully involved in alliances, partnerships, joint ventures, and the pursuit of acquisitions. Product life cycles and short windows of opportunity precipitate the need for businesses to work together. The identification and courtship of companies that the advisor's business may need, as well as companies that need the advisor's business, must be part of management's everyday activity. The strategic value of a company is its value in combination with another company. The strategic value can come form extended or new markets, products, technology, capital, production capabilities, personnel, or any other element where synergy may result.

During a recent speech to members of The Executive Committee, an international organization of CEOs, I asked the participants if they believed the US had enough manufacturing capacity; enough distribution systems and facilities; or enough sales people on the road? The answer was a resounding "Yes!" If that is true, then why are so many business owners spending the majority of their time building more of these excesses? They should be spending their time finding others to do it for them. Often, management's control needs are a serious impediment to corporate performance and value.

The key to obtaining a higher value is to be continually poised to attract a strategic buyer. Envision the value of the company in the optimum setting. Could its value double or triple in the right setting?

Understand Company's Potential
The first step is to understand the company's potential as a recipient or donor of competencies.

Know your competencies. Before one can determine whether a company can be a recipient or a donor, that company's technologies, production capacity, processes, manpower, etc. must first be examined in search of its competencies. Most competencies will be quite obvious; however, the search could uncover unusual competencies that may prove to be much more significant than expected.

Think each competency through. Be creative. Explore how the competencies can be exploited for the benefit of another company. What problems could each competency solve for another business? The practitioner should not limit his or her thinking solely to the financial advisory industry. Think outside the box.

An example of uncovering an unusual competency occurred during our firm's recent assignment to obtain capital for Borrego Springs Bank, an undercapitalized community bank. The bank's board of directors had had problems attracting the capital needed to improve its ratios and allay regulatory concerns. They had been to the market place to no avail. The directors should have explored who might be interested in the bank outside the financial community. They were not thinking that way. They thought any interested party would be another bank or similar institution. We asked, "Who strategically needs you and who do you need strategically?" It happens the bank is located near the Viejas Indian Tribe, which has been very successful in gaming. The tribe needed to invest strategically because gaming might not always exist in California. The tribe needed a bridge to industrial and economic activities, and its members needed to understand business.

We believed that the tribe would be receptive to an opportunity in which its members could learn more about business. We presented the opportunity to the tribe and, in the end, sold majority interest in the bank to the tribe. The tribe now intends to invest more capital and open additional branches. The bank's board of directors now includes tribal members who are learning banking and finance. The bank has also engaged in programs to assist tribal members with their personal financial needs and knowledge.

We identified a competence that the bank had not considered. When it was exploited, it turbocharged and significantly increased the bank's value. The result was capital for the bank, a significant new customer base, and opportunities for growth and new branches.

Know the competencies you can donate to others and the competencies you need from others. Many business owners and entrepreneurs feel, by nature, constrained by their surroundings. Many spend an inordinate amount of time and effort attempting to change what they have, rather then pursuing what they need. Owners are often so entrenched in their own business they fail to explore opportunities to obtain needed competencies from outside sources. Owners must believe that any needed competence could be available from another business. Conversely, they must believe there are businesses out there that need their competencies.

A marriage of competencies can take the form of a merger, an alliance, a joint venture or a contract agreement. The competence could come through an alliance with a company that has excess manufacturing capacity and could manufacture products, or from an international company that could market products, or from a hi-tech company that has laboratory facilities to solve research and development needs. The opportunities are unlimited; they just need to be pursued.

An example of building value between two companies with complementing competencies occurred for Litehouse, Inc., a rapidly growing manufacturer of fresh retail salad dressings. The company's objective was to become a national company and, as such, it needed production facilities in the eastern US Our firm was hired to search the eastern US for a salad dressing manufacturer with a modern plant and ample available production capacity. Our search identified a Michigan company named Chadalee Farms, Inc. This company not only had excellent facilities, but it had a strong market position in the manufacture of institutional food service salad dressings and sauces, a market in which Litehouse, Inc. had had only marginal success. Conversely, Chadalee had had only limited success in the sale of retail products. We transacted a merger of the two companies. Litehouse is now selling food service products in its market area and the Chadalee plant is producing and selling retail products in its markets in the eastern US.

Each company was both a recipient and a donor of competencies. The value of the combined companies is now turbocharged and far exceeds the value of each separate company.

Examine Opportunities
The second step is to examine opportunities for the company and how they can affect the future value. The advisor should get creative, thinking outside the usual general business patterns. Any business owner who is a pure entrepreneur has a new idea every week. Staff members should be asked to identify opportunities. "What else could we be doing?" The advisor should be continually familiar with buyout transactions, examining the deals and determining the synergies that brought the companies together. The advisor should know what gives the company value and how it can be made more valuable. He or she should attend trade shows for industries peripheral to the business and study trade journals for other markets as well as for the financial advisory industry. Researching how others are using the Internet is also a must. The advisor's business should be a platform for launching opportunities to increase value.

We recently represented a contract manufacturing company intent on increasing its value. The company was manufacturing products with characteristically low margins. While its customer base was more stable than most contract manufacturers, the company would be valued accordingly. The management was aware of recent sale transactions of like companies within the industry, and the values were unacceptable to them.

We determined that the company needed to manufacture proprietary products it could sell with its name on them. Companies with proprietary products generate higher gross margins, provide more opportunity for synergy, have brand and name equity, and are more attractive to strategic acquirers. Consequently, we worked with the owners and identified a product line that would fit into the company's manufacturing process. The company acquired the product line, and it now constitutes 50% of its production revenue.

While it is too early to tell what the impact on the value of the company will be, the company is now generating higher margins and is beginning to earn brand equity that it would not have if it were dealing strictly as a contract manufacturer. The turbocharger is in its "rev up" stage.

In another example of turbocharging company value, a client licensed technology from a billion-dollar public company. The license was exclusive; however, it restricted the use of the technology to a very select market segment. The segment was of little use to the licensor, but had significant impact on our client. We had earlier advised our client that whatever royalty payments they agreed to would pale in comparison to the increased corporate value resulting from obtaining the technology. Before the client could even introduce the technology to the market, acquirers knowledgeable about the company and its new technological capabilities pursued the company. Offers for the company were roughly double its value prior to the license.

Of the various ways to increase the company's value, our client focused its efforts towards obtaining a license for a leading technology. The success has proven to be the most profitable effort ever undertaken by our client. This is turbocharging!

Document every idea. Whether the advisor wants to pursue it now or not, most ideas are worthy of documentation. While some ideas warrant only being on a list, others should be researched as to their market impact or potential for the company. Ideas should be treated as if they may actually be implemented. The idea list should be continually worked, analyzed, and updated. The list should be made available to senior management. It can add energy and should promote creative thought. The list can also serve as a menu of opportunities should any current products or services be threatened by competition, narrow margins, or obsolescence. One of these opportunities may quickly be woven into the strategic plan and could reenergize the corporate team.

Should an acquirer approach the company, the idea list and opportunity research files will assist in increasing the company's value. Buyers will be interested in discussing the creative future opportunities that have been researched and documented over the years. Buyers are seeking businesses with an attractive future. They believe that with their capital, their additional markets, and their technology, they can greatly expand and cultivate what a company has. An advisor's idea list may align itself exactly with the potentials they are seeking.

Well-researched and documented opportunities will turbocharge a business and become a source of increased value to the advisor - whether it is sold or not.

Focus on Company Value
The third step is to focus on company value. Traditionally, business owners focus on major issues such as increased earning, market share, and product or service dominance. Seldom do they put much energy into preparing for that day when they sell the business. Many owners have no exit strategy. When the time comes to sell the business, they are often woefully unprepared. It has been proven over and over again: the value of the owner's time devoted to building value can make the value of time devoted to current earnings pale by comparison to the increased value achieved at transaction time. By implementing the following steps, an owner creates an environment to maintain the business at a "ready" position at all times.

Replace weak management. Can the staff run the business without the advisor? Are there superstars in all "deal breaking" positions? Are employees capable of accepting greater responsibility?

Smart acquirers invest in people rather then products. They know that a good management team is paramount to achieving the opportunities presented to them. Strategic buyers have capital, markets, and technology, but seldom do they have excess management; in fact, most have managerial deficiencies. An acquisition of a company with underutilized talent would be a rare gem for most acquirers. A powerful and cohesive management team is one of the most direct ways to turbocharge value.

Conversely, a buyer will discount an under-managed company. The advisor cannot expect to pass management problems on to an unsuspecting buyer. The buyer's due diligence will most certainly uncover weaknesses. The advisor should be asking him or herself, "Why am I putting up with these weaknesses anyway?" Weak managers should be replaced.

Recast and clean financials. A seller does not want to show a potential buyer the same reports shown to the IRS. The figures prepared for the IRS include every legal effort to reduce profit performance. Tax laws allow business owners to make certain expense decisions that may or may not be essential to the success of the business. They include owner salaries, owner perks, employee benefits, capitalization policies, low interest loans, and many others. A buyer may not incur many of these expenses. A recast financial report eliminates the nonessential expenses or write offs and displays the company's performance in the purest sense. It shows what its real horsepower is. This is the information that should be provided to a potential buyer.

Business owners should maintain an ongoing recast of their operating performance. An accountant or merger and acquisition professional should be consulted on acceptable recast issues and a monthly record of progress should be maintained. When preliminary discussions occur with a potential buyer, the discussion should center on the recast numbers. The accountant-prepared financial statements can be discussed later.

Do housekeeping. Business owners should look around their businesses with a critical eye. Does the company exhibit pride? Does it present itself well cosmetically? Are the work areas neat and clean? Are there areas needing paint? Do the signs and logos need refreshing? Does the business look "state-of-the-art?" If not, why not? This situation reminds me of the last time my wife and I sold our house. We spent time and money painting, re-carpeting, and fixing every detail so it would show well. My wife later asked me, "Why didn't we do these things earlier so that we could have enjoyed them while we were living in the house?" It is a question business owners should be asking themselves. Buyers want to be proud of what they acquire. They will pay more when their emotions are strong towards the business.

Conclusion
This installation guide for turbocharging a business is intended to provide more horsepower for the business. The turbocharger will bring more value at transaction time, and will bring more performance opportunities while the advisor "runs" the business. Unlike most performance accessories, this turbocharger is designed to decrease the wear on the advisor and the business. Get in the fast lane now. Turbocharge the value of your business. You can always use the speed.

Phillip L. Currie is Managing Partner of Shoreline Partners LLC, a San Diego-based, middle market investment banking firm that handles sales of privately held companies with $10 to $200 million in revenue and acquisitions for public companies. Currie can be reached at 858/587-9800 or via Email.