Blog - Strategy

How To Maximize Shareholder Value By Building Predictable EBITDA

Posted by Scott Newton on Mar 3, 2017 7:12:48 PM

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The idea of maximizing shareholder value through Strategic decision making is not new. Alfred Rappaport in his classic May 1981 Harvard Business Review series on Selecting Strategies that Create Shareholder Value laid out compelling methodology and decisions that can be implemented to improve the outcomes of the Strategic planning process tied back to financial statements and performance.

While business activities have evolved and the speed of technology evolution has increased the underlying responsibility of the business managers and board members to create value add for the Shareholder remains essentially unchanged. What is interesting is that inserting the predictably of EBITDA as a visible objective for management to work towards can increase overall value performance in our experiences.

Predictability of EBITDA can be confused with the unfortunately now abused “adjusted EBITDA” where managers adjust out variables in reporting which are not what I am referring to in this brief blog. Rather the goal is to make your company performance more predictable by working with your management team and business units to ensure earnings are stable and that risks are anticipated and addressed prior to unfortunate earnings surprises.

Three steps you can take to building predictable EBITDA with your teams start with making a visibly measured performance objective to deliver predictable EBITDA on a longer-term basis and not simply living quarter to quarter. Once this agreed to and the performance structure has been adjusted to reflect this critical goal the second step is to have managers identify the assumptions on which their budgets are based. The assumptions can be detailed and graphed relative to the overall market and expectations of how the upcoming years will unfold- if you are unsure how many years to predict for start with three. Graphing the assumptions about corporate performance versus the overall market while not an easy task is necessary, and if you encounter resistance to this it is useful to point out that assumptions of this nature are already embedded in budgeting anyway. What is illuminating to the team is to look at the assumptions when graphed against real data and notice where sensitivity is as this is the underlying risk that needs to be managed.

The management of risk and the building of predictable EBITDA lies within ensuring your teams take the advance Strategic and Operational decisions necessary to deliver results in the face of potential upsets and adjustments in market conditions. The third step is to have your teams explain in bullet points what decisions must be taken to reduce the risk and protect the budget. As an example, one company I was working with identified that it was likely a major supplier would experience disruptive financial problems within one year. The result would be late delivery and ultimately lower revenues for the company due to shipping delays caused by the disrupted supplier. By identifying this issue well in advance the team were able to begin sourcing from a second supplier prior to any challenges and thus ship on time and budget one year later while competitors struggled. This is the type of preventive decision making you can help install in your teams to increase predictability of results in the face of uncertainty.

One criticism you may encounter on working through the three steps is that it handcuffs the teams or does not allow the business units to take advantage of new upside opportunities and market changes.

What you can do to anticipate and reduce this resistance is to remind your teams of the following regarding the three steps:

1.) The first step which is agreeing to predictable EBITDA will make the company more attractive to investors and as a result, provide funding and valuation creating a larger “war chest” than competitors to grab new opportunities which is a significant advantage.

2.) To meet the objective of Predictable EBITDA the business units are graphing out their assumptions about the future which can include not only downside and also potential upsides that can be exploited thus increasing the bandwidth for capturing new opportunities.

3.) Advanced decisions taken to reduce risk are not set in stone and regular reviews (monthly and/or quarterly) can identify the new opportunities and allow business units to act in an agile fashion.

Predictable EBITDA takes time to build and in the beginning, can be a difficult exercise to launch however the results outweigh the initial resistance and provide the company with the increased valuation that enhances your reputation and position as CEO or shareholder representative while reducing the risk and protecting shareholder wealth.

The building of competencies in Strategic decision making start with this foundation and enable your organizations to be increasingly successful in managing volatile environments profitably and predictably.