We as entrepreneurs know we have to scale our companies to be successful, or even just to maintain them. Key value drivers help you do that, but what are key value drivers? And how do you grow a middle-market company that doesn’t have access to the resources small businesses are given (start-up money, grants, etc.) and don’t have the resources available to corporate giants? First, let’s start by identifying what your key value drivers are. Then, let’s work on making them drive that value!
What Are Key Value Drivers?
There is no information out there for mid-market privately held companies. Everything out there is predicated on personal experience and small sample sizes. However, if we want to be able to learn how to grow our companies — that we’re doing the right things — we need to compile the information from across the industries (public and private) into a playbook.
Without a standard, we can’t really tell what works. You can go to your trade association to get some data on aspects of how you’re doing, but there are barriers to even getting the information, let alone if the information is ratified or valid.
The National Center of the Middle Market is driving to close this knowledge gap. Each quarter, they survey 1,000 middle market companies and ask them a couple hundred questions, from their industry to revenue growth to new business. They take this data and deconstruct it to better understand the middle market and, by doing so, they identified nine areas that directly impact a company’s wellness — though two of these factors can’t be controlled by the owner.
What are the key value drivers? Tom says you can’t count on the economy or your industry as ways to influence your growth; however, we’ll discuss the key value drivers that best help you scale.
Seven Key Value Drivers
This one is pretty simple: You need to grow your company, whether that is by expanding your market reach by opening a new location in a different state or country or by adding another division to further service your own clients while bridging into another market niche. And create some barriers to entry to protect your market expansion so you’re not being bullied by companies with a larger market presence.
Ask yourself: Am I opening up new markets?
Formal Growth Strategy
Are you working with a strategy in place, or are you reacting to everything? You need to take your goals and put them into a workable and actionable plan. Following that, do you have a team that can work on this with you and help you achieve your goals? Are your visions aligned? Take a look at how strong the communication is between departments and between yourself and your management team. You have to keep yourself in the loop with what’s going on so you know when problems arise and can work to solve them as soon as possible.
Ask yourself: Do we have a growth strategy in place?
Investing and Innovating
This links to the first two. Part of your growth strategy should be market expansion, and that comes with investing and innovating. You need to budget for this, of course, to make sure you can build plants or offices fast enough to handle the expansion without going bankrupt.
If you’re going to partner up with private equity or an investment banker or whomever, make sure you have the right fit before you do. It’s a big decision, and not every firm will see the value in your company or match your vision.
Ask yourself: Am I constantly thinking about better ways to run my business and service my clients or customers?
Attract and Retain Top Quality People
You want the best in breed. Where are you finding your staff and are they the right people for the job? Are you developing them the right way? Are you investing in your own people? If the talent you want to get is not interested in your business, why not? Do you need to look at your pay structures and compensation to hold onto the people who matter most?
Your employees want to see a real career path. They want to know how to get their next promotion and be engaged in the company. You’re not going to be able to hold onto a really great employee who feels stagnated and blocked from progressing their career.
Ask yourself: Am I fully staffed and are those staff in the right positions?
We lightly touched on this back earlier. Managing your money really matters. For example, Tom Stewart of the National Center of the Middle Market said that 75% of mid-market companies believe they’re managing working capital well or very well. At least half of them are wrong, however. There’s a huge gap here, whether it’s in payables, receivables or inventory. In fact, the gap between the 25th percentile and the 50th is 2x — and the gap between 50% and 75% is also 2x. That means the gap between 25% and 75% is 4x.
These gaps indicate there is a serious discrepancy between how someone thinks their company is doing and how it is actually doing, but we need some benchmarking to show the middle market we can do better.
Ask yourself: What does my working capital really look like, and who can help me analyze it?
Where are you spending money that maybe you shouldn’t be? Are your compensations structures reflective of the roles they encompass? Are you putting money into dead tech or services that aren’t really bringing you a significant return? For that matter, could you be outsourcing some of your labor or services?
Ask yourself: Where am I spending too much and where too little? How can I ratify this, and who can help me do it?
Clients ask us all the time, “What are key value drivers?” They’re so simple, but complex at the same time. Chances are, you’re already doing some of them; the issue is that we’re not focusing on the right ones or doing them in the right way. These seven area well-mapped and supported starting point. The important thing to remember here is that you need to do some business due diligence to identify areas you’re doing well in and areas you need to improve.
The data shared here is a great background for that. If you want to follow a step-by-step plan, check out our Growth and Exit Planning Ultimate Guides (here’s the first). They’re a free resource we provide because we truly believe entrepreneurs need more information to be able to empower themselves to grow as much as they want.