Predicting future success is risky.  Mostly, investors define value based on historical data of cash flows with analysis of market trends, comparable values, management ability, and forecasts with macro-economic indicators to balance findings.

These metrics don’t dig deep enough.    Buyers camouflage real forecast with obsession for EBITDA growth defining value heavily weighted on multiples of cash flow.  Of course this is important!  But, we often obsess on quarterly cash flow growth without understanding an organization’s ability to build sustainable growth.

These are other indicators of future growth and value:

  • What is really behind customer relationships and pipeline? Customer mix?  Understanding contract relationships with terms and volume speaks to contrasts of customer trust or vulnerability.   What levels of senior management involvement exist indicates value of relationships.  Data on churn exposes trends.  Variance reporting on pipeline management measuring changes in timing and revenue indicates depth of commitment to managing future.  Does assessment of ability for expansion into new markets exist?
  • What about product pipeline? Is analysis available measuring life cycle of current products?  Take a historical view of new product innovations and delivery and compare that to expectations for new products post transaction.  Analyze not just on product delivery, but on innovation and creativity around product packaging and promotion.
  • What are pricing trends of products or bundles for service offerings? Pricing is a marketing tool.  How have companies managed and reported change in pricing and demonstrated creativity with pricing a competitive weapon.  Leveraging price creating longer term commitment in customer relationships demonstrates ability to deliver future value.  Can the company demonstrate deeper understanding managing product mix in volume and gross margin trends in relationship to pricing?
  • Simply understanding R&D spending (operating, capex) and investment in marketing/product development is an indicator of ability to sustain growth. If EBITDA trends are up, but investment in these areas are in decline or lower % of revenue, we see an indicator that future growth trends will not be sustained or lacks a roadmap for new product or packaging innovation.

Change is rapid and competition fierce.  Managing the future without adherence to product development and innovation throughout the cycle will eventually result in value decline.  BOD’s and Management not investing in growth will result over time in irrefutable decline and loss in value.

http://www.incrementalinnovation.com/innovation-management-development/rd-to-innovation

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