Business model generation WITH THE LEADING TOOL

Today being successful is a term, that requires far more than just a good product/service. It requires a winning business model. Creating one, requires one to connect key elements of the business model in a creative and innovate way.

Below we are pointing out 12 key elements of the business model canvas that one should consider:

• Problem – What kind of pain end users are experiencing (without your solution)?
• Solution – How are we successfully and efficiently addressing the pain?
• Unique selling point (USP) – What makes our solution stand out and differ from the competition? 
• Key resources – Which resources are fundamental to competitive advantage creation (eg patents, trademark, company culture, etc.)?
• Channels – Which channels are used for the distribution and communication (costs vs. ability to get feedback).
• Target segments – Which potential end users / clients we are targeting and what their characteristics are?.
• Indicators – What are the prerequisites for the success and how we are going to measure our performance?
• Key partners – Who are our strategic partners (suppliers, end users/clients, creditors, investors).
• Risks – Which risks are key to address and how?
• Revenue sources – How we are going to generate revenues and what will be our pricing policy?
• Cost structure – Which are our costs, what is their nature, what is our break even point, what return is expected? 
• Key activities – Which activities are crucial for us to reach our goals?

Download the BUSINESS MODEL CANVAS for FREE for your use.

Please note that creating a business model canvas is normally only a beginning of the strategic and business planning. Creating a winning business model requires us to dig into details as well, test our assumptions etc. Nevertheless, it makes it extremely easy to agree upon fundamentals and set the healthy & promising starting point.

When designing a business model it is important to understand the nature of market gaps. Thinking in this way will not only boost the probability of your success, but also improve your value added. Success is by no means conditioned by standing out in all elements of the business model. Sometimes it is enough to change only one element. Last but not least, it is often a preferred choice to go niche and address more specific needs. Going general requires more resources and is far more challenging to handle. Normally it is a “big fish” bet.

Business model generation is intertwined with many other questions such as how to find promising end user / client problems and how to successfully address them, how to find and establish a USP, how to raise attention of the target segment, how to maximize your added value, how to know when is the right time for business model changes etc. In case you are open for us to widen your horizons, let us know. We will be glad to work on another interesting case!

More about CORPORATE STRATEGY and BUSINESS PLAN.

The post How to make a winning business model? appeared first on Consilue.

Preparing a business plan is advised to all companies regardless of their size and market presence – startups as well as established mature companies.

Business planning allows you to increase the chances of success in the market, ensure further growth and development of the company.

The purpose of preparing a business plan can vary, but most often it is related to:

• Expanding the product / service portfolio
• New market penetration
• The launch of a new project
• Reorganization and revitalization of the company
• Collecting sources of financing (debt, equity, grants)

Well-prepared business plan discloses the feasibility of the business idea and foresees its success. Growth and development of business ideas also depend heavily on strategy, therefore development of the business model has to be approached carefully and in line with guidelines provided by experts.

The role of the consultant in the process of business plan preparation could be simply to provide a feedback regarding the quality of the business idea, or also to connect stakeholders such as potential customers, partners and investors, provide strategic business guidance, link technical and business knowledge and look for opportunities to develop new ideas.

It is wrong to think that a business plan in any way inhibits or restricts creativity and flexibility. It is strongly recommended solely due to the fact that prior to realization of a business idea one has to check its viability and get acquainted with the path and the obstacles that have to be overcome.

Elements of a good business plan:

• Analysis of the environment
• Market research
• Organisation
• Product/service plan
• Research and development
• Human resources
• Timeline
• Key risks and problems

Mandatory components of the business plan, connecting the above mentioned elements, refer to financial projections and scenarios of success. Together they form a realistic assessment of the business idea potential based on the business and its risks. Well prepared financial projections relate to future returns, required investments in working capital and fixed assets and the extent of non-monetary categories.

Based on the financial projections bankers and various other funds decide whether to support a business idea and thus provide sufficient sources of funding for its success.

Contact us for the counseling program and engagement proposal!

The post Business plan formulation – here’s how to write a business plan appeared first on Consilue.

COMPANIES ARE CREATING VALUE FOR THEIR SHAREHOLDERS IN A MORE AND MORE ORIGINAL WAYS. THEY BET ON VARIOUS THINGS: INNOVATIVE BUSINESS MODELS, ECONOMIES OF SCALE, COMPETITIVE ADVANTAGES ETC. APPROACHES DIFFER AND SOME MAY EVEN LOOK STRANGE FOR THOSE THAT DO NOT REALLY HAVE A STRONG FINANCIAL BACKGROUND – CASE OF HOME DEPOT INC.

Company Home Depot Inc. is a US retail giant, selling equipment for home, garden and workshop. Their products and services are sold throughout the network of 2.200+ stores in USA, Canada, Mexico and online. The company is the biggest retailer worldwide in its segment. In financial year 2017 the company generated 101,0 billion USD net sales and 16,5 billion USD EBITDA. More than all non-financial legal entities in a smaller country such as Slovenia, EU.

Why is increasing the financial debt beneficial?

The company operates in a smart way. Part of the success story is linked also to the financial structure and its restructuring. In last years the company is increasing the level of financial debt and decreasing the level of equity. In this way Home Depot Inc. is increasing its Return on equity (ROE). Meaning, the shareholders’ equity is being managed in a more and more efficient way. Let’s look more in details how this is possible.

Development of invested capital and return on equity (ROE) of Home Depot Inc.

Source: Home Depot Inc. Consilue analysis.

Invested capital as at the end of FY 2017 amounts to 28,5 billion USD. Financial debt equals 27 billion USD and shareholder’s equity 1,5 billion USD. One can quickly notice that the indebtedness measured as D/E ratio is »very high«, 1611%. Nevertheless, the ratio as such is not really problematic. The key is to consider the market (not book value) indebtedness ratio. In the case of Home Depot Inc. future returns on invested capital are expected significantly above the weighted average cost of capital (WACC). The market value of equity therefore significantly (more than 100x) exceeds its book value, making the healthy debt levels significantly higher.

The more value the company creates, the higher the optimal levels of debt. As the debt levels built, the ease of creating value for shareholders increase. And the system works as a spiral. The more debt there is, the higher the value for shareholders.

Financial debt and debt management

Financing mix with a leverage as in the case of Home Depot Inc also brings challenges. A mistake in managing financing can have serious consequences. Financial debt can quickly show its other face. Proper supervision of risks and stabilization of future cash flow is therefore of crucial importance. Management of Home Depot Inc. is well aware of this fact. They are eager to continuously strengthen the underlying competences. Especially those that influence the increase in gross margin and further development of competitive advantages.

Financial debt is being managed carefully. Risks related to new obligations and danger of eventual liquidity gaps are continuously addressed in a proper way. The majority of debt is of long-term nature. Its maturities match the maturities of underlying projects. The company does not seek to create »fast« profits at the expense of differences in maturities. The company is aware of risks and the fact that this is not really their business.

Table of financial debt as at the end of FY 2017 (m’ USD):

Source: Home Depot Inc. Consilue analysis.

The financial structure is despite the relatively leveraged financial mix, stable. What makes it sustainable is the value that is being created. Additionally, the lenders are also well aware of the fact that the ratio Net debt / EBITDA as at the end of FY 2017 amounts to »only« 1,4x. This fact additionally strengthens the position of the company. It messages that in case of tightening, the financial debt can still be relatively quickly repaid with operational cash flow.

The success story described above still has space to develop further. The debt levels are not yet optimal, meaning that in the area of debt management there is still space for improvements and value creation. Yield to maturity for 10-year bonds is below 5,0%, meaning that eventual increase of debt levels is further improving the weighted average cost of capital.

The developments described are strongly appreciated by the investors. The value of the Home Depot Inc. stock in last 7 years strongly outperformed competitive peer companies. The growth was truly significant, from 30 USD/share to 200 USD/share. Furthermore, the company was also paying out dividends. Compounded annual growth rate (CAGR) of the Home Depot Inc. stock in the period that matches FY 2011 – FY 2017 amounts to 28,5%, compared to the 9,6% growth of S&P Retail index.

Chart: Stock price development

Source: Bloomberg. Consilue analysis.

As we see, the financial debt is taking the nature of equity. D.E.B.T. is the magic word or key to a success of Home Depot Inc. The more the indebtedness increases, the more the value increases. On the given case we see how event the financing structure can become the source of value creation for shareholders and even a strategic competitive advantage of a company.

Is value creation in your company addressed in a sufficiently advanced way? Do you know the specifics and best practices that would fit your company best? Does your strategy hide innovative financial & business approaches or you think it is just another block of paper in your drawer? Which strategic decision may hit your competitors next?

The post D.E.B.T. – a success story of a US giant Home Depot Inc. appeared first on Consilue.

TECHNOLOGY BRINGS REVOLUTIONARY CHANGES INTO THE BUSINESSES. IT ENABLES NEW DIMENSIONS OF COST OPTIMIZATION ON ONE SIDE, AND EXTREMELY FAST AND CHEAP EXPANSION ON THE OTHER SIDE. THIS CENTURY IS FOR SMART INVESTORS DEFINITELY A GOLDEN ERA. FROM THE PERSPECTIVE OF VALUE CREATION, MEGA INVESTMENT OPPORTUNITIES ARE SHOWING ON THE INVESTOR RADARS – CASE OF MASTERCARD INC.

Mastercard Inc. is a specialized technology company offering e-payment solutions to banks, governments and others. In other words, clients are offered super-fast network for processing end-users’ transactions. The company philosophy is to simplify and upgrade the payment process. Efforts of the company are built around the main concern – to offer safety and security. The company today has 1,8 billion cardholders around the world, mainly in USA, UK, Canada and Brazil. Their brands MasterCard, Maestro and Cirrus became known as synonym for non-monetary business.

Sustainable achieving of high margins in the long-term

Through decades of operations the company developed key competitive advantages, which guarantee today’s success and include strong brand, high level of trust and global network of partnerships. Strong brand impacts the demand, high level of trust as the element of differentiation enables high profit margins and global network of partnerships results in economies of scale and optimal cost structure of operations.

Financials confirm the superb performance of Mastercard Inc. Market share of the company in 2017 hit 17% (2016: 16%, 2015: 12%), while net sales reached 12,5 billion USD. Business performance is improving as a result of consumption rise and changing consumer habits. In terms of value creation, an important fact is linked to the ability to maintain high and stable margins. EBIT margin for years already exceeds 50,0%.

Chart: Net sales and EBIT developments of Mastercard Inc.

Shareholder value creation is what really counts!

The success story of Mastercard Inc. (or some other company operating in tech-sector) recognized by investors is actually a bit deeper. It is linked to the potential of future value generation, which is significantly impacted also by a relatively low operations growth financing needs.

Technology is an interesting phenomenon. It allows one to reach economies of scale fast and without significant investments in capital expenditures (CapEx) or Operating expenditures (OpEx).

The growth as such for Mastercard Inc. does not represent a significant financing burden (compared to non-tech sector companies). In other words, the operations can expand through the existing solutions and significantly impact the value created. If we additionally take into the account the fact that nowadays still 80% of transactions are in cash and the pace of changing consumer habits, we understand the true value drivers.

How easy it is for Mastercard Inc. to finance its existing operations is obvious even now. Despite the relatively high (16,0%) growth of net sales in 2017, the level of shareholder’s equity remained on the same levels. Net profits were paid out in full. The needs of increasing invested capital were addressed completely with increased levels of financial debt. Despite raising of the financial debt, the indebtedness ratios are actually improving, since the market value of equity increases faster than the financial debt.

Every company has its own specifics of shareholder value creation, so it is important to understand what boosts company value the most!

The CEO of Mastercard Inc. Ajay Banga says: »Our investments are focused on the safety, security and development of solutions that fuel high growth of our business.« He is well aware of the areas of the biggest risks and the biggest opportunities. This fact confirms also recent acquisitions, which are executed with a purpose to expand the capabilities of the company and take over the technical solutions, which are about to present a competitive edge for the company in the future. For example, with acquisition of VocaLink Holdings Limited company gained advanced know-how in the area of real-time account transaction processing; with acquisition of Brighterion, Inc. the company gained the AI technology to better understand the transaction flows and prevent the security and safety gaps.

Companies that continuously create value for shareholders have competitive advantage over competitors and wider, meaning in the industry. In case of Mastercard Inc. we talk about the combination of attractive industry and strong competitive advantages. The company stock outperforms even those with biggest potential, selection of NASDAQ index companies.

Chart: Performance of Mastercard Inc. stock vs NASDAQ index

The thoughts of Mastercard Inc. management are concentrated on the core value driver – company’s growth and securitisation of underlying risks. The tools used are exclusively of technological nature. Technology & competitive advantages are the answer to smart managing of companies in 21st century.

The pace at which the technology is brought into the daily operations is high. It requires introduction of new business models. Preparation of more advanced business strategies. Continuous restructuring of activities. Implementation of creative ideas etc. As a result, the capital market positions of the most active companies are drastically improving. They attract investors. Grow the value for shareholders.

What about you? Are you aware of potential that the technology has in the context of your operations? Do you consider its implementation? Do you know which investments are smart and which actually represent a burden for your company?

What are the other shareholder value creation success stories that we know?

Company Uber offers transportation services and has no cars; Facebook is a media company and creates no content; Alibaba is a trading company with no stocks; Airbnb markets real estate, which are in possession of others etc. All these companies master the technology and its impact on value creation. Technology is revolutionizing the whole industries, which is primarily the cause why many sectors stagnate.

The answer on how to “Uber-ize” many other businesses is hiding the potential for new billionaires!

The post Impact of the technology on the shareholder value creation appeared first on Consilue.

THE LEADING MULTINATIONAL COMPANIES EXPLOIT ADVANCED KNOWLEDGE OF STRATEGIC CORPORATE FINANCE (INCL. VALUE-BASED MANAGEMENT) TO MASTER THEIR DECISION-MAKING. WITH OPTIMAL OPERATIONS THEY BUILD THEIR WAY TO RECOGNIZED MILLION DOLLAR POTENTIALS.

Nowadays we are witnessing a serious competition among companies in the market. The world changes at extremely fast pace. Requires agile, self-learning businesses, flat organizational structures, innovativeness in the whole supply chain and wider, implementation of digital in all processes and many other characteristics, which are nowadays preliminary for the success of corporates. Doing business became complicated in its simplicity, while one of the crucial questions being asked today is “How the right decisions are made in the firm on every level?”

Value-based management became in last two decades the “religion” of the leading corporations around the world. It refers to the theory of corporate finance, focused on shareholder’s value maximization. The value is the only indicator that reflects information in a complete, comprehensive and non-biased way. What is more, value added approach enables one to address all processes and stakeholders in a simple way, with one single number.

»The only relevant KPI for owners is the value of their equity share.«

Value-based management – GOOD PRACTICE?

One of the cases where good practice of value-based management is present is Sika Group, a chemical producer giant with HQs in Switzerland. This multinational has 200 companies around the world and is present in 101 countries. It generates 6,25 bn CHF net sales and constantly brings 25%-30% return on invested capital (ROIC). Added value per employee is 115.000+ CHF. Under the umbrella brand Sika, 850+ product brands are promoted. The company persistently grows, organically and with M&As. Only in 2017 the company executed 7 acquisitions and registered 74 patents. And why this multinational is so successful? Definitely also thanks to strategic choice that EVA (Economic Value Added) analysis are performed for every strategically important decision being made.

Let’s look at the business of this multinational from another perspective. Sika Group is a collection of projects. Every project has its own returns and risks. Resources are limited, so decisions are rational. There is nothing wrong with the projects with relatively modest return, if very little is being risked. Also there is nothing wrong with high risks, if high returns are expected. To sum up, the company makes their decisions in line with the value generation and promotes those projects where most value is added with the underlying risks considered.

VBM decision-making in practice

Demonstration of value-based management findings in case of Turkish company acquisition (graphic is symbolic; numbers are not actual):

Commentary of value-based management findings: Acquisition of Turkish company generates significant economic value added (chart: 195 mio CHF). Management proceeds with the execution of the acquisition, since ΣEVA (PV) is positive and in terms of relative project performance among the Tier I projects.

Demonstration of value-based management findings in case of new production line implementation (graphic is symbolic; numbers are not actual):

Commentary of value-based management findings: Purchase of production line for the penetration of selected developed markets with new products is not confirmed, since this decision, due to the relatively low profitability, destroys the value for shareholders (chart: -5 mio CHF). Management seeks alternative business opportunities.

As it can be seen from the two examples above, understanding of the economic value added is simple. This is making value-based management a desired approach for the decision-making. Furthermore, it is a uniformed system, that clearly prioritizes best projects and thus defines priorities of the company. The approach makes sure that the company does the right things first and only then the efficiency of making these right things is considered. In this way the comparison of short-term, mid-term and long-term choices is simplified; only top-notch investments are preferred; allocation of resources is improved; transparency of operations is better etc.

Value-based management is due to its advanced nature more and more often also referred to as smart management tool. It leverages all the knowledge of the capital markets in combination with advance analysis of operations, industry and market opportunities. It helps companies strengthen their relative power. In the long term, using value-based management means heading the optimal way forward, heading in the direction of success. The advantages of value-based management are well understood by the leading multinationals, this is way value-based decision-making is their preferred approach for quite some time already.

The post How to do business to make more for yourself? VBM in practice. appeared first on Consilue.

Optimal capital structure (often also referred as or optimal financing mix) is one of the basic things required for a sound business. It refers to the way how companies finance their assets, how much it costs them and what they risk with it. Generally speaking, we talk about payables financing (suppliers), debt financing (banks) and equity financing (shareholders).

Corporate finance theory often addresses financing through weighted cost of capital (WACC), signaling the minimum level of return on assets engaged for which the economic value of the company is not being destroyed. For a perfect capital mix, the WACC is the lowest and the value for shareholders is maximized.

Financing mix: Balancing debt – equity

The chart presenting WACC in relation to the D/E ratio is U-shaped. Right part of the curve (area where the D/E ratio is above the optimal levels) is much steeper than the left part, signaling the fact that being too indebted is a bad decision to make.

The risk-taking of creditors is by its nature normally limited and therefore the financing is relatively attractively charged … at least as long the company indebtedness is in the healthy zone. When the company bridges that zone, the creditors start demanding higher collateral, decreasing the days of receivables outstanding, seeking to securitize receivables with third parties and increase the prices of goods sold, increasing the interest rates for refinancing activities etc. In this phase the company is already operating on the edge, risking increased illiquidity threats.

Optimal debt level is a relative term

Interestingly, levels of a sound financial debt globally significantly varies and is very much correlated with the 1) attractiveness of the region for the investors and investment flows as well as 2) growth potential. As expected, the highest debt levels are in developed countries such as USA and Western European countries (roughly 60% D/E ratio; 7x-8x Financial obligations / EBITDA ratio), followed by the developing Latin American countries, China, African & Middle East countries (roughly 50% D/E ratio; 6x-7x Financial obligations / EBITDA ratio) and relatively poorly indebted Eastern European countries and India (roughly 40% D/E ratio; 3x-4x Financial obligations / EBITDA ratio).

Almost half of the companies globally operate without or with minimal (<10%) financial debt and from that perspective do not exploit their full value maximization potential. On the other side, the debt of larger companies is often above the industry averages, transforming the debt into the strategical competitive advantage. In this context, we sometimes also see marginal leverage buyouts (LBOs) cases, that due to the leveraged nature and long-time periods often generate some value on the debt side.

Access to the right financial resources is crucial

Financing resources are the prerequisite for the company to operate as well as grow – organically (i.e. own investments in PPE) or inorganically (i.e. through M&A). When the company is growing at a fast pace and the business is either working capital intensive or PPE investment intensive, the company needs to be able to sufficiently provide new sources of equity as well. Generally acceptable is that the more mature the company is, the easier it is to find, maintain and optimize the financial resources. Companies in the early stages of development therefore often need to seek the seed and venture capital, since their risks are simply too high for the standard and risk-averse (not risk-loving) creditors. Furthermore, also companies in the early and mid-developing phase with high growth potential often come across liquidity problems, if they are not efficiently gathering their financial resources.

Equity financing is on one side most exposed to risks, but on the other side also unlimited upwards in terms of reward, since all the potential profits go to shareholders.

To sum up things, in terms of value for shareholders, a sound mix is preferable. Liabilities (payables financing & debt financing) help the company to exploit the full potential of value generation, while equity normally serves as a buffer.

Despite the fact that most successful companies in the last decade generated their value mostly through digitalization and non-asset intensive growth, the financing structure overall is not losing on its importance. Quite opposite, the market is becoming more competitive, leaving less & less space for errors and non-optimal financing structure.

The post Importance of optimal capital structure appeared first on Consilue.

Normally company receives equity financing in several rounds in order to motivate management and decrease the underlying investment risks.

If a company is worth 60 units (pre-money valuation) and an investor makes the investment of 20 units, the new, post-money valuation of the company amounts to 80 units. The ownership share gained in exchange for a new investment thus amounts to 25%.

In case of start-ups, the value estimation is due to high risk somehow vaguer. Therefore angel investors and venture capitals often offer certain investment amount for a particular ownership share based on their experiences and insights. Let’s say 25% for the investment of 20 units. However, by doing so, they have implicitly set the post-money valuation of the company to 80 units and pre-money valuation to 60 units.

This basic example illustrates the general concept. However, in reality the calculation of post-money valuation is more complicated due to convertible loans, in-the-money warrants and in-the-money employee stock option plans (ESOP).

In fact, the pre-money and post-money valuation should derive from the calculation of price per share multiplied by the total number of shares. Therefore, one has to consider the number of shares on a fully diluted and fully converted basis.

If the value per share increases compared to the previous round, then the investment is called an upround. It eventually means that the pre-money valuation is higher than the post-money valuation of the previous round. For the vice-versa case industry practitioners use a term downround.

The post Pre-money & Post-money valuation appeared first on Consilue.

The post Business valuation – for whom and why? appeared first on Consilue.

Business valuE determinants

Business value is affected by cash flows from operations, changes in net working capital, net investments, growth potential and underlying risks. Any measures improving these determinants will influence the business value.

However, not everything is in the power of companies to influence. Business worth is significantly impacted by macro factors. In this context one should understand the importance of economic climate as well as industry developments and trends. This is why timing to M&A is very important.

Hint: As consultants we often prefer to present the client the value development cycle. Business valuations in various points in time is a good reference point for them to see if they are confident with the business value at a particular time.

Prioritizing the measures – doing the right things counts

The more value the company adds to the supply chain, the more important player it is and higher its business value. For that reason, it is important to understand first the needs and requirements of key stakeholders and ways to meet them effectively and efficiently. Based on that fact, one should then be prioritizing the recommendations shared below … 

Tips & tricks for higher business valuE

Step 1 to higher business value: Ensure high cash flows from operations

– Differentiate your business
– Brand your product
– Tie your clients to your products/services
– Focus on most profitable products and/or services
– Acquire the right sales & marketing techniques and grow your revenue
– Appreciate and retain your key employees
– Establish barriers to enter the market
– Gain bargaining power against other companies in the supply chain
– Exploit large prepayment discounts
– Supervise the COGS
– Enhance the productivity of employees
– Optimize interest rates and taxes

Step 2 to business value boost: Optimize your net working capital

– Establish partnership relation
– Negotiate better payment conditions
– Optimize inventories and inventory turnover

Step 3 to business value maximization: Optimize your net investments

– Be aware of consumer trends
– Choose the right timing for acquiring new technologies
– Carefully plan capital investment – make investments that will support growth
– Increase the capacities in line with demand
– Ensure that the level of investments covers the growth potential
– Optimize financing

Step 4 to business value enhancement: Enhance your future growth potential

– Innovate with business model and come up with creative strategy
– Rethink processes and stick only to those that add value to your clients
– Develop new products and services

Step 5 to high business value: Minimize the risks related

– Keep the level of indebtedness at the level of comparable companies
– Endeavor appropriate product/service mix diversification
– Disperse your sales geographically
– Gain deals of appropriate size
– Supervise the creditworthiness of clients and suppliers
– Assure the level of fixed costs as low as possible
– Inform owners extensively and on a regular basis
– Give priority to transparency

Maximizing the business value is the most important criteria there is in running your business. For that reason it is important to follow the value of your company continuously, strive to bring the value maximization goals closer to the stakeholders involved, introducing the value based management techniques and setting up the KPIs based on business value maximization principles etc.

As a rational investor, one should always keep in mind also the exit strategy. The fact is that as an owner you will not be able to run or follow the company forever, so have a plan how you plan to divest your investment from the very beginning.

The post Business valuation booster – tips & tricks that work! appeared first on Consilue.