Value Driver Three: Higher Growth Potential

Nov 19, 2019

While growth is perhaps the most universally sought-after business objective, the elements that contribute to a scalable business model may not be quite as evident. We can unpack growth potential into the following three categories: 1) Business infrastructure, 2) Operating efficiencies, and 3) Sales and distribution channels. By recognizing the multiple paths toward organic growth, owners and managers can set tangible goals to drive toward enterprise growth, which increases enterprise value.

Business Infrastructure
Business infrastructure references the systems and processes that support company operations. Systems include accounting software, payroll processing, CRM modules, and other platforms used to run the business. Processes span activities like decision-making and employee communications, hiring, financial planning, product development, sales and operations planning, manufacturing, and shipping. Sustainable growth requires scalable systems and processes.

Companies rarely start out with the infrastructure to scale to $100 million in revenue and beyond (nor should they). Accounting systems are a common area where operators recognize the need for upgrades as growth milestones are achieved. Certain software platforms work perfectly well for companies with $1 to $50 million in revenue, however, they may not serve the organization’s reporting needs once operations have expanded and are spread across multiple locations. While it might be possible for the benefits manager to on-board employees when hiring volume is low, a dedicated HR associate may become necessary when hiring volume picks up and multiple employees require on-boarding during the same week, or perhaps even the same day. Growth also necessitates more sophisticated supply chain capabilities to increase production and appropriately manage production and delivery. What areas come to mind where your organization is experiencing pain points? The answer likely points to areas that would benefit from business infrastructure upgrades to support repeatable growth.

Operating Efficiencies
Operating efficiencies represent the ability to add sales faster than cost. Maintaining a company’s systems, processes, and workforce requires a certain amount of fixed expense. Each dollar of sales introduces some level of variable costs and also covers a portion of fixed costs. At a certain level of sales, fixed costs are covered and each dollar of sales less variable costs flows down to the bottom line. Contribution margin measures the degree to which each additional dollar of sales becomes profit.

Monitoring contribution margin helps to protect against “buying growth.” While it is possible for a retail company to double growth each year by opening a certain number of new stores every year, growth of this nature is costly and unsustainable. The greater an organization’s operating efficiencies, the greater degree each additional dollar of revenue will increase the valuation.

Sales and Distribution Channels
Value grows alongside an organization’s ability to serve existing customers and reach new customers. Sales channels represent the various ways a company brings products to market and distribution channels are the means by which products are placed in customers’ hands.

Sales and distribution channels are unique for each company and depend heavily on the industry and customer groups. A business-to-business company may rely heavily on a salesforce, while a business-to-consumer organization may rely heavily on social media selling channels. In both scenarios, value is built through established channels, and grows with the ability to quickly reach new customers.