Comments on the Model

The following are the ratings on Acme Software’s RVD Model, which are prioritized based on the chart above:

• Increase Pricing (Rating 9.25): The potential returns from increasing pricing were high for Acme. 100% of any price increase would fall straight to the bottom line, less any sales commissions. If Acme increased prices by 20%, EBITDA could potentially double. Revenue was $10 million, and a 20% price hike would raise EBITDA by $2 million, or double EBITDA to $4 million from $2 million. The company considered such an action to be low risk because it required little time and money to implement and it was reversible. As a result, Acme focused on this value driver first due to its potential for high returns and the low amount of time and investment required to implement it.
• Document Comparable Transactions (Rating 9.25): Acme was aware of several companies within their industry that received multiples of 10.0 to 12.0, but they had no documentation to back up these transactions. Acme believed they could obtain more information regarding the transactions through several well-connected individuals in their industry, as well as through their investment bankers and professional advisors. While the potential return from this value driver was less than that of increasing pricing, little in the way of time and money was required to obtain this information. As a result, they began executing this value driver immediately after they increased pricing.
• Reduce Staff-Related Risk (Rating 7.75): Acme had several key employees who lacked employment, confidentiality, and non-solicitation agreements. The lack of agreements represented a significant risk to a potential acquirer but could be cleared up with minimal cost in a matter of several weeks. Acme asked their attorney to prepare employment agreements for key staff that included non-solicitation agreements with retention bonuses to ensure the employees would be retained in the event of a sale. The retention bonuses served as a form of consideration, which is required for contracts, and improved the enforceability of the non-solicitation agreements.
• Reduce Concentrations of Risk (Rating 6.75): Acme also had key employee, customer concentration, and product concentration risks. While these risks couldn’t be immediately mitigated, plans could be put in place to ease these risks over time. For example, the risk of key employee concentration was reduced by more evenly spreading duties across the management team. Customer concentration risk was mitigated by asking key customers to sign long-term contracts. And finally, product concentration risk was tempered by developing strategies to invest more in marketing their entire product line, as opposed to just a few products.
• Increase Revenue and EBITDA (Rating 6.25): While the potential impact of increasing revenue and EBITDA was significant, doing so involved a considerable amount of time and investment. Acme realized that the primary method for increasing revenue, and therefore EBITDA, was to hire a more experienced sales manager and invest in building the sales infrastructure, so the sales team could scale up their impact on the business. This required a significant investment in time and money, as well as a reasonable level of risk. But the risk was contained by hiring a third-party expert to help interview and screen potential sales managers.
• Conduct a Code Audit (Rating 6.25): Acme’s owners had some background in development, but they weren’t 100% sure the software was clean and well documented. They realized a buyer was likely to retain a third party to conduct a code audit during due diligence, and they reasoned it would be wise to hire an independent firm to review the code before beginning the sale process. The audit was expected to cost approximately $15,000, but they felt the investment was justified given the potential impact on improving the certainty of closing once a buyer was located.
• Strengthen IP (Rating 6.25): Acme’s name was well respected and known in the industry, but they lacked trademark and invention assignment agreements for their developers. The owners felt they could obtain a trademark, so they hired an intellectual property attorney at a cost of $25,000 to perform a trademark search, file for a trademark, and prepare invention assignment agreements for key staff. The process was expected to take approximately four to six months. While doing this wasn’t expected to significantly impact their valuation, it mitigated risk for the buyer, therefore reducing the due diligence risk for Acme and improving the certainty of closing.
• Enhance Sales and Marketing (Rating 6.00): Acme lacked sales and marketing documentation and infrastructure. They realized this might take a significant amount of time and money to build. Since the potential impact wasn’t as substantial as value drivers higher on the list, such as increasing pricing and reducing staff-related risk, they assigned this value driver a lower priority given the amount of time and money required to execute it. Acme assembled a team to document the sales and marketing processes, expecting this process to take approximately three months.
• Increase Cost To Replicate (Rating 5.75): Acme’s owners felt that a few competitors could easily replicate the functionality of their software, but they felt they could implement several defensive strategic actions to increase the difficulty of replicating the software. Acme enacted these strategies over a period of three months.
• Maximize Recurring Revenue (Rating 5.75): Acme’s enterprise customer agreements were renewable annually, and many customers stalled during the renewal process. Acme felt they could create an incentive to motivate customers to agree to an automatically renewable contract. Still, this transition process would take at least one year as they thought it would be best for customers to sign the new contract upon the expiration of each annual contract. Acme began implementing this process simultaneously while documenting their sales and marketing processes since they realized that transitioning to automatically renewable contracts would take considerable time.
• Strengthen Customer Base (Rating 5.25): Acme lacked agreements with the majority of its customers and knew this represented a significant risk to potential buyers. To counter this risk, the company created several pricing models with various contract terms and tested those models over a period of 10 to 12 weeks with the goal of creating a pricing model that incentivized customers to sign long-term agreements.
• Improve Documentation, Infrastructure, and Scalability (Rating 5.50): Acme lacked the documentation and infrastructure that could help it quickly scale, but the owners realized that improving the documentation and infrastructure would require an enormous investment of time and money – perhaps up to nine months or longer. They also recognized this work would distract their employees from other projects. As a result, they decided this was their lowest priority value driver and planned on executing it as their last priority.

A value driver is any action you can take that can potentially affect the value of your business. The goal of the RVD Model is to help you increase the value of your business with the least amount of effort.