Country / Language

A Winning Strategy for Future Capital Needs: Think Sustainable, Long-Term Growth


10/23/14

Attracting millions of capital dollars is the dream of every business owner. But it is not going to occur overnight - and it may never occur if the primary goal is to sell the business, rather than build the business.

The surest path to achieving a successful, sustainable business is to focus on long-term growth – and the investment interest will follow in due time. “Investors do not want companies that are built to flip. They want companies that are built to last and that can sustain revenue growth. Investors are willing to pay top dollar for such companies,” said Ira Weinstein, CohnReznick Co-managing Principal of the firm’s Baltimore office.

There are measures companies must take to position themselves for sustainable success, foremost of which is to instill a focus on long-term growth and profitability rather than short-term liquidity. Such a strategy will inevitably make a company more attractive to capital sources.

CohnReznick has identified the following five issues that companies can focus on to maximize the long-term value of their business – for when a company demonstrates long-term, sustainable growth, the equity opportunities will inevitably follow.

1. Due Diligence: It’s Not a Means to an End – It’s Business Best Practices

Supporting the long-term value of the organization requires executing due diligence on an ongoing basis in the ordinary course of business. One of the more significant items that should be included in the due diligence process is a robust internal controls program. Not only do internal controls protect a company from a host of risks, they also help it run more efficiently and effectively so that when it is in a position to seek capital, such providers will have confidence in its operating and financial functions.

Bear in mind that due diligence is not just about ticking off compliance boxes or satisfying external auditors. It is about ensuring that there are procedures in place across the enterprise to help a company achieve its objectives and protect itself from a myriad of risks – both internal and external. Such risks include:

  • Operational risk – Arising from a failure in systems, processes, or controls;
  • Strategic risk – Arising from fluctuations in the economic, political, or competitive environment;
  • Financial risk – Arising from market, credit, or liquidity risk, or a failure of systems, people, processes, or controls; and
  • Business/entity risk – Arising from a lack of board and senior management oversight, policies, and procedures or tone setting.
     

Quite simply, a strong system of internal controls equates with good governance. Investing in and strengthening internal controls will provide a level of assurance to investors, lender, acquirers, and other stakeholders, and ultimately lead to achieving the most favorable results from a transaction.

2. Know Your Market Niche and Competitors

Many business leaders are so immersed in day-to-day responsibilities that they do not spend the time required to become intimately familiar with where they fit into the market and who their competition is. Companies should know how their product or service fills a need in the marketplace. They should know the size of their potential market, the size of their current market share, who their customers and competitors are, and how they are changing. By staying informed, companies can remain relevant in the midst of fierce competition.

Clearly, learning the market is not a one-time investment of effort for companies. It is an ongoing process, and business leaders must be engaged on a regular basis. Spending at least a few minutes each day to read industry journals and websites in order to stay on top of industry news is essential. Executives’ involvement in professional associations and their efforts to maintain open conversations about the market with their vendors is also helpful.

In fact, vendors are an excellent source of ground-level market intelligence. They can provide information on competitors, describe what other industry players are doing, and help companies keep tabs on their own points of differentiation. Too often, companies lose touch with their competition and do not know if they are losing their market advantage. Flat revenue is the first conspicuous sign—but good companies make adjustments before revenue sags.

Market knowledge is also an important avenue to growth. Organic growth is ideal, but at some point acquisition may become necessary to maintain or accelerate growth, which requires a liquidity event. Companies should be familiar with their competitors large and small, and should consider building causal relationships with them. These relationships can eventually lead to synergistic business opportunities. The best acquisitions do not come from business brokers. The best acquisitions come about because the business owner or management team knows the market and has personally identified targets they are interested in acquiring.

3. Drive Sustainable Revenue

Sustaining customer and revenue growth are vital for companies. Horizontal revenue means one thing to investors – it means they will not get the return they want from their investment.

To sustain revenue and minimize customer churn, companies must innovate and add services and products. They must continually introduce new and appealing features for their customers.

Often, customers come to expect these enhancements—and get them without paying for them—but this is how companies keep customers. And a large part of sustainable revenue is the ability to retain current customers while attracting new ones.

4. Build a Scalable Business

Scaling requires action on a number of business fronts. In summary, it means adding products, services, and customers. It means keeping in mind that past results are no guarantee of future performance. In other words, the accomplishments that got companies to where they are will not get them to where they need to go.

Companies must ensure that their business model guarantees long-term growth and they must be up to the challenge:

  • Quality: can they continue to deliver the level of quality that their customers expect?
  • Quantity: can they take on new customers without suffering a decline in quality?
  • Capacity: can their internal systems handle the weight of new customers?
  • Capability: do they have a management team strong enough to handle growth?
     

”In fact, attracting and retaining a good management team is critical to building a scalable business, because an experienced and highly functional management team can address competition and identify opportunities to drive expansion in the market,” said Weinstein.
 
5. Focus on Profitability

It is usually those companies that are not in dire need to sell that receive the highest valuation—those companies that are well managed, have products in demand, and profits. Arriving at this desirable position means continuing to innovate to stay relevant and maintain competitive advantage.

Growth is an alluring word in almost any industry—but creating profitable growth is the key to turning a small company into a large company. To fuel long-term profitable growth, companies must invest in a competitive advantage that entitles them to it. Companies can grow in a competitive market by cutting prices or increasing promotions, but those maneuvers do not increase competitive advantage and, therefore, do not fuel long-term profitable growth. They require a company to trade margin for revenue growth—and driving revenue growth for its own sake rarely creates the success that entrepreneurs want.

Companies must also understand their cost to acquire customers. If a company is spending one dollar to earn one dollar, that is not an effective business model. If that dollar comes from a customer that can be counted on for an increasing multiple over the long term, then this customer could be very valuable. If a company spends one dollar this year to earn one dollar this year—and earn another dollar each year for the next 10 years—then that is a more worthwhile investment.

What Does CohnReznick Think?
Company valuations are roaring back. However, buyers and investors seek companies that are built to last and can sustain increases in revenue. The time is now for companies to position themselves for success by focusing on building a strong foundation with sustainable customer growth and profitability, rather than short-term liquidity.

Contact

Please visit the CohnReznick’s Private Equity and Venture Capital Industry webpage and contact Ira Weinstein, Co-Managing Principal of CohnReznick’s Baltimore office, at 410-783-8328 for more information.


This has been prepared for information purposes and general guidance only and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is made as to the accuracy or completeness of the information contained in this publication, and CohnReznick LLP, its members, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.

Search Our People

Search Our People

Look ahead. Gain insight. Imagine more. Is your business ready to break through?

View our new TV commercial..

Industry Outlooks

Industry Outlooks

Gain insight into what is ahead for the Commercial Real Estate, Technology and Middle Market Private Equity industries.

READ MORE

Learn about our upcoming events.

READ MORE

Working With Us

Working With Us

What makes CohnReznick different from others in our profession? And what should our clients come to expect when working with us? The answer is The CohnReznick Advantage. Contact us to learn how we can out the CohnReznick Advantage to work for your business.


People

The value of an organization is determined by the skills and qualities of its leaders. With more than 280 partners serving clients nationwide, CohnReznick is renowned for the diverse experiences, knowledge and backgrounds of its leadership.

Learn More

Services

We align our services in three segments: Accounting and Assurance, Tax, and Advisory. This approach allows us to provide holistic solutions to complex business problems and to seize upon opportunities requiring an integrated approach.

Learn More

Industries

Accounting and tax issues different significantly based on an organization's industry. We provide clients with expertise in nearly two dozen industries – we know the opportunities, the obstacles, the competitive landscape.

Learn more

Insights

CohnReznick professionals are thought leaders in their industries. Clients benefit from relevant and timely economic, legislative and industry insights that can keep them a step ahead of competition.

Learn More

Global Reach

Our involvement in the Nexia International network of firms enables us assist our clients wherever they do business-providing local expertise and connections wherever they needed. Nexia is comprised of 20,000 professionals operating in over 100 countries.

Learn More