There is no magic recipe for building a successful company. And there is no road map for managing a supply chain during a global trade war and pandemic. But there are ways you can get ahead, no matter the obstacle in your way. Knowing how investors and potential acquirers assign value to your business is essential – and that value is evolving with the news of the day. For that reason, evaluating your core strengths from a variety of perspectives — for each market segment and product type — will undoubtedly get you a better picture of your valuation.
Above all else, positioning your company for a successful equity investment round or high multiple exit to an acquirer requires a strategic focus and ability to communicate a central “North Star Goal,” especially when there are so many elements, many out of your control, swirling around you and your team. Driving organizational behavior, values, and efficiency will lead to success.
But what common themes interlace the way that many investors and acquirers determine valuation; and what areas are of particular valuation focus now?
Four core themes (with many sub-components) are always assessed:
Viability (Timing / Financials / Market Share)
Operational Execution Capability
While all these areas are important, let’s dive into the value of Operational Execution Capability a little deeper.
WHERE WE ARE: A three-year-old (and ongoing) trade war with China coupled with the global impact of COVID-19 has forced supply chain management into the valuation spotlight. Fortune Magazine’s recent survey found that 94% of Fortune 1000 companies reported major disruptions to their supply chains over the last 12 months.
Supplier selection used to revolve around identifying vendors with the cheapest cost of good, best just-in-time delivery capability, followed by driving year over year cost reductions of 3%. Many executives have been made painfully aware that the way their supply chains were operating — a just-in-time inventory management system coupled with a highly consolidated supply chain relying on a few key suppliers — have added significant, unpredictable, and highly-costly levels of risk to their businesses.
Many acquiring companies have seen the weaknesses of their supply chain strategies exposed over the past few years, and heightened over the past few months; they now put a higher premium on acquiring quality teams who have demonstrated an ability to effectively build and manage a diversified international supply chain rooted in strategic partnerships.
Expanding supply chains to a new country is a time-consuming activity. New vendor identification, financial and technical qualification, new tooling and capital equipment, raw material and finished component QC validation, and master service agreement negotiation can easily take 8 months even for highly flexible and efficient organizations with a clear mandate. For larger organizations, it’s simply more challenging to “turn the ship”; this process can take upwards of 2-3 years. Thus, an acquiring company’s perceived value assigned to existing and high-functioning operations takes into consideration more qualitative factors like new product potential speed to market, the opportunity costs of pulling internal team members away from profitable activities into more speculative market expansion initiatives, Cap Ex vs. Op Ex allocation strategies, and the ability to mitigate 7-8 figure legal/tax planning/permitting/new business registration costs. If positioned correctly to a strategic acquirer with a present need, a high-functioning and diversified supply chain can add an additional 3-5X EBITDA to acquisition offers.
McKinsey estimates that China represented 35% of global manufacturing output in 2019. That is likely to drop significantly moving forward, as many companies have already begun the process of diversifying supply chains into South Korea, Vietnam, Malaysia, Mexico, and the U.S. Let me be clear; China will still dominate manufacturing output for the foreseeable future. The overwhelming majority of companies I speak with are in the process of qualifying new suppliers in new countries; yet still plan on using their Chinese supplier as a production anchor for several more years. However, with pain stemming from the long-term costs of limited supplier dependency, it is now clear that building and effectively managing a geographically diversified supply chain with the capability to quickly respond to a variety of economic, political, raw material, environmental, and health-related disruptions is increasingly critical to business survival, success, and valuation.
WHERE WE’RE GOING: Undeniably, diversifying your supply chain will increase Selling, General, and Administrative Expenses (SG&A) costs. Managing a complex international supply chain requires strong project management, material planning, contracting, accounting, and QC engineering support. Online tools have made it possible to communicate far more efficiently than in years past. However, consistent face-to-face interaction from project managers and QC engineers will remain essential as a company builds and grows new relationships.
Two additional trends we are seeing are an acceleration into robotic automation and an increase in strategic joint venture partnerships. Manufacturers need a strong offtake agreement from a customer and investment in order to automate with new capital equipment. Companies need a trustworthy in-country partner who can effectively execute, consistently communicate project status and material constraints, and continue to drive efficiencies via value-added design-for-manufacturing and cost-out-engineering support. Building and maintaining a relationship like this takes capital, time, and the ability to effectively communicate goals, risks, financial upside potential, and a larger strategic vision. In other words, a well-managed and properly diversified supply chain embedded with quality strategic relationships is now being viewed as a proxy for evaluating business risk, leadership capability of executive teams, and forward-looking profitability from a more macro perspective.
In summary, investors and acquirers now put a premium on supply chain adaptability, responsiveness, and resiliency. Administratively, managing an effective system that provides real-time data and proactive risk mitigation adds significant value. The first, and essential step, in re-creating a valuable supply chain is building strong strategic partnerships that can help manage vendor relationships and effectively communicate potential logistical risk.
Josh Beck is Managing Director & CIO at BCI Technology Investments.