Hitting Your Home Run — Step 1

The Foundation of Your Value Creation Plan

Francisco Lindor Home Run vs. LA Angels, August 4, 2019. Courtesy of Eric Drost.

I’ve had the great fortune to be part of amazing teams in three different chapters of my career — Fortune 500 companies, startups, and Private Equity. All three have helped me hone my value-creation playbooks. These playbooks can help you triple the value of your business.

This series of posts will step you through the process of setting goals, creating your plan, executing it, and realizing the value you create.

This first story focuses on building the foundation of your plan — your goals, vision, and potential growth levers.

Job #1: Growing EBITDA

Your business’s value is mainly based on current and future expectations of the profits and cash flow it will produce. It boils down to three key factors:

• Your profitability (measured in EBITDA)
• The share of revenue that recurs or re-occurs
• Your revenue growth rate

EBITDA is commonly used in Private Equity to level the playing field for businesses. It’s relatively easy to get and it indicates a business’s ability to generate profits from its core operations. The stream of EBITDA is the fundamental value driver of your business.

The recurrence of your revenue model ramps your valuation multiple up and down. You can see the difference from industry to industry — consider SaaS subscriptions versus one-off consulting engagements.

Your growth rate combines your revenue model with your effectiveness in acquiring new customers and expanding existing ones. You can also realize economies of scale (operating leverage) as you grow, increasing your profitability. I’ve illustrated an example below of a business’s value multiple doubling for every 20% increase in its growth rate.

Illustrative example of growth’s impact on Enterprise Value

Document your vision

Now, you need to define success before you can build the plan. You likely have this vision, but may never have written it down. The ingredients are universal for all types of businesses and fundamental to planning.

Here’s a starting point:

In your own words, what is your niche?

Why does your company exist? What's its purpose?
(generally, not specific to our market)

What's your 3- to 5-year picture?
- Revenue
- Revenue growth rate
- Profit

What will the company look like then?
- 3-5 numbers/measurables (like employees, clients, churn, etc.)
- 3-5 intangibles (bullets that create a visceral picture)

What will your elevator pitch for the company be then?

Spend time on these goals and hone them. Make them stretchy, but not unachievable. And ensure they align with your desired outcome.

Think about trends and leading indicators. Ensure that you maintain focus on your EBITDA run rate and the next level of growth. Test your vision against your peers and competitors if possible.

Workshop: Drafting growth levers

Next, you need to gather data and engage your management team to construct the plan.

Preparation

• Collect historical data and trends for key measures including your goals (revenue, profit, and other measurables).
• Highlight the differences between where you are today, the trends, and your goals.
• Assign members of the team to present what they know about the business, the market, the customer, and the competition. Where are the potential sources of growth? What are the current impediments?
• Ensure each team member is ready to present their ideas to achieve the next level at the workshop.

The Workshop

• Review your documented vision and goals.
• Review where you are and the ground you have to cover.
• Review the market, customer, and competitive trends.
• Have the team present their sections — opportunities and impediments to accelerating growth and achieving the goals. Typically, these will cluster in Go-To-Market Acceleration, Process/Product Enhancement, and M&A.
• Grossly prioritize the ideas by impact and effort.

You should end the day with a list of 5–10 material ideas that can be matrixed like this:

The Impact-Effort Matrix

Add a third dimension

By definition, your estimates will be optimistic due to the Planning Fallacy bias. When I work with teams, I like to ask them to add a third dimension to the picture — Confidence — to help mitigate the bias based on my experience in product management.

You can wrap up your working session like this:

• Recap the team’s ideas. Preferably, put them on a flip chart so they can all see.
• Give everyone a numbered ballot corresponding to the ideas with columns for Impact, Effort, and Confidence.
• Ask them to cast votes using common, objective criteria, for example:

- Impact: High = $10 million in run-rate revenue/ARR by year 3
- Effort: High = 12 months to launch
- Confidence: Low = 50/50 shot, Medium = 80/20, High = Certainty

Note: Confidence includes both the Impact & Effort estimates.

• Tabulate the votes in a spreadsheet and create an I*C/E priority by multiplying Impact and Confidence and dividing by Effort. You can easily sort from high to low.

ICE Priorities

That’s the foundation of your plan — your goals, vision, and prioritized draft growth levers built with your management team. In the next story, we’ll take this foundation and synthesize your plan to hit a home run.

Jon Sonnenschein has been an Operating Partner for Bregal Sagemount, a mid-market Private Equity firm, since 2017. Prior to Sagemount, Jon achieved six successful exits in Silicon Valley, including one as CEO. Jon earned an MBA in Marketing and Management Strategy from The Kellogg School of Management and a BA with Distinction in Economics from The University of Michigan.