The quest for value creation often overshadows an equally important endeavor: value harvesting. Just as a farmer doesn’t simply plant seeds but also knows when to reap the harvest, business leaders need to recognize that value isn’t only about creation but also about identification and extraction. Here, we’ll dive into three key areas where this principle applies: diversification, focus, and resource reallocation.
Diversification in Business: Lowering Risk to Uncover Value
Why Diversification Matters
Conventional wisdom says that putting all your eggs in one basket is inherently risky. This axiom holds true in the realm of business valuation as well. Companies dependent on a single customer, product, or supplier often find themselves at the mercy of factors outside their control. Diversification in terms of sales channels, customer base, and product portfolios automatically increases your multiples and thus your enterprise value (EV) by lowering your risk profile.
Case in Point: Niche-to-Agri Transition
Consider a business primarily selling resins to the military. By identifying applications in the agriculture sector, the company was able to diversify its revenue streams and reduce dependence on a single client, thereby enhancing its value even at the same level of revenue/profit.
Industry Example: Walt Disney
Disney has multiple lines of business—movies, theme parks, consumer goods, and now ski resorts—that operate in synergy. The benefit here is multiple expansion by diversifying risk of a single business line. Their diversified assets enhance the total value of the ecosystem, leveraging creative assets across multiple sales channels and products (especially characters!).
FOCUS! Leverage Your Core Competency
The Power of Comparative Advantage
In economics, theory suggests countries should specialize in the production of goods where they have a comparative advantage (even if they don’t have an absolute advantage). The same principle applies in business. Business owners should focus on their top intangible assets, such as brand or technology, focusing on where they have a distinct edge.
Personal Insight: Trading Off Expertise
While remodeling an investment property, I focused on my own comparative advantage: financial analytics—modeling trade-offs between the price and durability of goods, sourcing the optimal financing, and studying market rents. Meanwhile, our decorator focused on aesthetic elements, procuring furniture at discounted rates. Each party focused on their area of expertise, thereby adding disproportionate value and creating a more valuable real estate asset.
Industry Example: Microsoft’s Acquisition of LinkedIn
From a valuation perspective, companies with defensible intangibles are more appealing than those whose value mainly resides in goodwill. When Microsoft acquired LinkedIn, the clear intangible assets and synergies made the acquisition justifiable and straightforward. Value only accrued from then on.
Resource Reallocation: Be Dynamic, Do More with What You Have
The Agile CFO and CEO
Just like a good wealth manager, a savvy CFO needs to be agile with capital allocation, shifting between debt and equity based on cash flow stability. CEOs should similarly be adept at moving human resources to areas where they can add the most value.
Example: Enterprise Rent-A-Car
The company regularly runs tournaments among its employees. Top performers get to share their success strategies across the organization by moving to new positions in underperforming markets or areas where they have more responsibility and larger territories under management. This cultivates a culture of excellence, mobility, and using people to their highest and best use.
Example: Toyota’s Management Philosophy
Toyota has been able to achieve more with less by adhering to “The Toyota Way,” their unique management philosophy which focuses on process and standardization. By maximizing return on assets (people & machinery), they were able to surpass national manufacturers in both quality and efficiency.
Conclusion
Uncovering latent value in your business doesn’t always necessitate reinventing the wheel. Sometimes it’s about smart diversification, doubling down on your core competencies, or reallocating your existing resources more efficiently. As Warren Buffet once said, “Price is what you pay, value is what you get.” Recognizing and harvesting this intrinsic value is the key to long-term business success.
Jordi Pujol, CFA
Managing Director, Valuation
Jordi has 10+ years of financial modeling experience and has worked on a vast number of financial reporting engagements, tax opinions, and intangible asset valuations.
Disclosure
This article is for informational purposes only and does not constitute an offer, invitation or recommendation to buy, sell, subscribe for or issue any securities. While the information provided herein is believed to be accurate and reliable, Objective Capital Partners and BA Securities, LLC make no representations or warranties, expressed or implied, as to the accuracy or completeness of such information. All information contained herein is preliminary, limited and subject to completion, correction or amendment. It should not be construed as investment, legal, or tax advice and may not be reproduced or distributed to any person. Securities and investment banking services are offered through BA Securities, LLC Member FINRA, SIPC. Principals of Objective Capital are Registered Representatives of BA Securities. Objective Capital Partners and BA Securities are separate and unaffiliated entities.
