The Stress Test Every Business Needs

2Do you know the intrinsic value of your company and how to manage it?

Daniel Burkly

“How are we going to double the value of our business in the next five years?” a business unit leader of a large industrial equipment manufacturer asked her CFO.

The pair had just received this mandate from the CEO, who had watched the company’s stock price flounder, and had commissioned a study to determine how to achieve top-decile results for total shareholder return (TSR). The study laid out specific value-creation targets for each part of the company; for this business unit, it was doubling its value in five years. The question was: “How?”

The company had been in extreme cost-cutting mode for several years. Along with doubling the business unit’s value, the CEO was asking for more of the same: slash R&D budgets, reduce the sales force, and drive back-office efficiencies.

The business unit leader had two concerns with the push for more cost cutting: first, she had to do significantly more than reduce expenses to double the business unit’s value; and second, the cost cutting was becoming unsustainable. The challenge was how to make a convincing case to her CEO. In addition, she also needed to lay out the strategic vision for her own management team.

After putting their heads together for a few weeks, the business unit leader and CFO decided they would need a comprehensive valuation analysis to help chart the path ahead.

The analysis included the following:

• An objective, as-is valuation ...