A simple definition of value creation, according to Bob Hogan, managing partner at Milton Street Capital, is raising the long-term profitability barometer of a company. He says he’d distinguish between profits, which is just a measurement at a point in time, versus profitability, which is the ability to earn a profit over the long term.
“And if you continue to raise that each year, then you're going to take some steps towards creating more value in a company and effectively, what you buy it for here and what to sell it for here,” Hogan says.
At the Houston Smart Business Dealmakers Conference, he bristled at the idea of an acquisition playbook because the strategy is different for every company that’s bought or receives an investment. But generally, he says that everything starts with people. As an investor, he says they are either going to partner with an owner, founder, family or family business that’s selling. Sometimes, when the owner wants to transition out, it means finding someone who's going to stay with that business to grow it even further going forward. In that situation, the business is going to need a new leader.
“The biggest thing we can do as an investor is we've got to find the right CEO,” Hogan says. “And if we find the right CEO, he or she is going to put the right executive management team together, they're going to put the right culture in place in the business, they're going to do the kind of things that, as an investor, we can give them the direction on that but the actual implementation of those things is going to take place at the company level.”
Once that’s in place, he says the next step is to make operational improvements and commercial improvements. Operational improvements, he says, are usually finite, fixable, specific investments. Commercial investments, which he says can offer more significant multiples of improvement, tend to take longer, but still need to be made up front.
While a buyer might land a successful business, in order to get to the next level, the buyer needs to be able to accelerate the velocity of results, something that could be facilitated in part through technology. For Hogan, when he ran a business for many years that did three PE deals, it was about making sure that the company’s sense of urgency was as fast or faster than that of the private equity partners.
“I don't think you get a lot of that tension if you've got connection and you've got that same similarity in terms of, here's what we want to go do with this business,” he says.
Another way to raise profitability is to understand the company’s value proposition. But more than that, it requires illustrating that value in a clear way.
“I'm a huge proponent, sometimes a little rabid, about really dollarizing your value proposition for your customers,” Hogan says. “In other words, our product lasts longer. Our product requires less service time. Our product is going to allow you fewer changeovers, or whatever those things — the features of what your products and service or delivery capabilities mean: You don't have to do this, Mr. Customer. Take those benefits that you're providing your customers and dollarize what those things mean to your customers.”
For a business owner who's thinking about taking an investment or selling their company, there's often a trade off of what to do now to make the business attractive as an acquisition versus what to leave for the investors to do after the sale. For Hogan, it would be on the revenue side.
“If I've got a business, I'd be looking to figure out how can I go create some revenue growth, which is really hard to do,” he says. “But I would look at my pricing strategy. And I would be figuring out where I can go.”
