How adopting a Lean Six Sigma culture bolsters the value of your company
Whether you’re looking for outside investment, considering selling your business, want to hand your business to the next generation, or simply want to grow your business while retaining more of the gross revenue, adopting a Lean Six Sigma (LSS) culture can help. There are many advantages to adopting an LSS manufacturing culture focused on reducing waste and defects while improving your customers’ experiences. Most business leaders understand how LSS improves profitability and agility, but equally important is the effect on the valuation of a business when it comes time to expand or sell. With valuations ranging from liquidation-based to 9+ times multipliers against adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization), there’s a lot to be gained by implementing LSS, whether you intend to sell or not. LSS businesses are worth more than their less-structured counterparts. While business valuation can ultimately be composed of many inputs and methodologies, one of the largest factors usually considered is the long-term viability of the company. Viability speaks to the sustainability of the current position and trends.
Here’s how Lean Six Sigma can help to influence the viability and valuation of your company.
- Business intelligence
LSS business leaders manage through daily interaction, the key performance indicators of their businesses and can demonstrate continuous improvement from their historical benchmarks. This improvement shows potential investors that the current earnings ratios have been, and can continue to be, improved. Frequently, investors will consider a discounted cash-flow analysis valuation. But if you can demonstrate that margins continue to improve “organically,” then that valuation will be forced higher. Likewise, if a going concern valuation is used, then the continuous improvements in margin will help to support that your profitability is sustainable and improvable.
- Production consistency
LSS businesses have analyzed their processes and introduced automation and standard work in mission-critical areas. By automating and implementing standard work, companies are less reliant on specific personnel to maintain or expand their position. Conversely, if your business relies on a few key contributors, the valuation will be reduced.
- Customer loyalty
LSS businesses are frequently highly integrated with their key customers as supply-chain partners. These integrations make it extremely difficult for a customer to switch providers, and therefore they’re only likely to do so under extreme provocation. Furthermore, deep integrations allow for higher-value services at lower costs and higher margins, making it very difficult for competitors to offer a compelling reason to switch providers. Since well-managed LSS manufacturers also track their Net Promoter Score (NPS), they can demonstrate the increasing breadth and stability of their customer base. Customer loyalty is a significant factor in a business valuation, as it bolsters an investor’s confidence in the sustainability of performance.
- Overall Equipment Effectiveness (OEE)
Investors tend to be less impressed by the book value of equipment on your production floor, than by the efficiency with which the equipment is operated. A relatively new and infrequently used piece of extremely expensive equipment, is likely to be much less interesting than a reasonably-priced piece of “workhorse” equipment that operates daily at maximum efficiency. LSS businesses are constantly monitoring and making improvements to their OEE – and consequently, tend to have a stable of equipment that adds to their business value.
- LSS culture
An LSS business has a growth-oriented culture that permeates the organization. Innovation is inspired by empowering every team member to suggest improvements. Employee engagement is much higher and attrition is mitigated by ensuring that highly-effective and engaged employees are properly compensated and rewarded. A stable, effective and engaged workforce, with distributed authority, supports the business continuity that investors look for when evaluating the future potential of an acquisition.
- Lean management
Touring an LSS business can be an impressive experience. When investors visit an LSS plant, they can be taught to understand the production flow and status in only a few minutes. Material flows in a predictable fashion from work cell to work cell; equipment and functions are clearly labeled; bottlenecks are easily identified; operating status is reflected visually; tools are clearly identified and have a permanent home; supplies and consumables have a standard location and reorder process; each job can be tracked through the manufacturing process to shipping; and visual management and scorecards reflect the performance goals and achievements of each work cell. In other words, Lean management makes it very easy for an appraiser to gather the information necessary to fully understand plant production workflow.
- Clear business capability
Lean Six Sigma helps to identify whether business processes are in control and what their control limits are. An LSS business will work to ensure that all processes are in control and that their variance doesn’t exceed the control limits set by service-level agreements with customers. In short, an LSS business can clearly and authoritatively express its business capabilities to its investors. As LSS businesses are continually improving their capabilities, this data is likely to expose a point of differentiation from other investment targets, increasing the eventual valuation.
Whether you adopt a Lean Six Sigma culture to improve your company’s profitability or as part of your succession strategy, the immediate benefits are improved control, consistency and profitability. When an investor considers a purchase, he or she wants to know that they’ll be able to run the company without you. Lean Six Sigma can help you to develop a company that operates profitably with less and less oversight required.
When (or whether) to sell your LSS business
As you improve your business processes, improve profit margins and create stronger relationships with your clients, your balance sheet should reflect these business improvements. After several years of demonstrated and controlled improvements, with a respectable compound annual growth rate, you should be in a better position to command a high multiplier for your business. When you have a business with empowered and engaged employees that uses proven processes to satisfy the needs of loyal, integrated clients, daily oversight becomes less onerous – and you may possibly decide to keep the business and manage it at arm’s length. Or, armed with this new information, you may find that another option is to buy less efficient companies at a low multiplier, and increase their value by implementing all of the LSS efficiencies that you’ve developed in your business. If you do decide to sell your LSS business, you’ll be confident that you’re going to demand the highest multiplier possible under current market conditions.
Dan Sparrow has been at the disruptive forefront of the industry for the last 25 years in the Americas, Europe and Asia. He holds a Master’s Degree in Sustainable Commerce, and Advanced Certificates in Behavioral Economics, Lean Six Sigma and Strategic Negotiation. He’s held senior positions with Heidelberg, HP and Esko, and is currently a consultant to consumer brands and print manufacturers – with a focus on lean production, automation and cultural/digital transformation. He can be reached at email@example.com.