The following is an excerpt from a chapter written by Harish Chauhan, CEO

Business by Philosophy for Peter Merrick's recent book titled: The Trusted
Advisor's Survival Kit

Help your clients unlock

Up to 74% of their business value
or watch them lose it

Unlocking the hidden value and wealth inside businesses provides an unprecedented
and timely opportunity for trusted advisors and their clients

by
Harish Chauhan
OVERVIEW

What is the biggest and best reason for your clients to keep or make you “According to recent
their trusted advisor? This chapter aims to provide you with that reason. PricewaterhouseCoopers’
analysis of the US market,
intangible assets and
Business owners, with the help of their trusted advisors, are always goodwill constituted 74 per
looking for ways to make more money, have more success, and protect cent of the average purchase
their wealth. price of acquired companies
in 2003 (with, respectively,
intangible assets
Intangibles, including goodwill, account for up to 74% of the purchase representing 22 per cent and
price of a company1. Consequently, business owners are at significant residual goodwill 52 per
cent). These findings are
personal risk and financial loss if they are not well advised on how to certainly in tune with the
harness the full value locked up in their intangible assets. increasing attention now
being paid to the
Advisors can either help their clients build wealth by maximizing, management of intangible
assets by companies in the
structuring and better managing these assets, or they can ignore these US and worldwide”
assets and, by default, bear witness and responsibility for their client’s – Reporting the value of
loss. acquired intangible assets
(article) by Tony Hadjiloucas
and Richard Winter,
This chapter introduces a solution – the Unifying Philosophy (UPh). PricewaterhouseCoopers,
Outperforming slogans, missions and vision statements, the UPh is an London
‘operational asset’ that helps builds more ‘extractable’ value in a business
while reducing company specific risk. This chapter focuses on:

• How Trusted Advisors can more effectively grow their practices, gain more
clients and generate more revenues by helping their clients unlock 74% of their
business value

• How their clients are losing money right now without having a UPh and can
achieve greater success with a UPh

• How much more their clients’ companies could be worth if they properly
implemented a UPh

With the solutions presented in this chapter, Trusted Advisors now have an essential
blueprint to help their business owner clients grow their business successfully – reducing
risk and enhancing profitable value for both the short and long terms.
5.7 The UPh – Showing you the Money

What are the real financial and non-financial benefits for a business “According to recent
owner to develop a UPh for their business? How much return and PricewaterhouseCoopers’
analysis of the US market,
how soon? intangible assets and
goodwill constituted 74 per
To illustrate the financial, value and risk impact of the UPh on a cent of the average purchase
business, Sean Cavanagh, CA and CBV of Navigant Consulting price of acquired companies
in 2003 (with, respectively,
has been generous to provide the following explanation. intangible assets
representing 22 per cent and
Harish presented a past client to me to analyze the impact of the residual goodwill 52 per
cent). These findings are
UPh on the value of the business at the time of implementation and certainly in tune with the
years after when the UPh was fully rolled out. With only a cursory increasing attention now
review of the financial information, a professional determination of being paid to the
management of intangible
valuation was not available, however, I was able to discuss how the assets by companies in the
UPh affected various aspects of the corporate risk in the company US and worldwide”
and the impact on profitability as determined by the information he – Reporting the value of
acquired intangible assets
presented. (article) by Tony Hadjiloucas
and Richard Winter,
PricewaterhouseCoopers,
B&A Bakery had been a prime distributor of bread products London
throughout southern Ontario since the mid 80s. The company was
acquired by the Sunderji family in 1991, when it was producing
$2M in revenue. In 6 years the family worked long and hard doubling annual revenues to
$4M. The younger of the two sons had a desire to double revenues again to $8-10M
within 5 years by producing ‘parbaked’ bread that is partially baked then frozen to be
cooked in minutes after purchase. They went into full expansion mode by purchasing a
new 50,000 sqft building for $2 million and a $500,000 freezer that would produce the
bread with an equity injection and a $1million secured loan in 1997.

However, the “build it they will come” philosophy did not work and there was need for a
plan to implement the vision. Customers were not grasping the parbaked product or why
or what B&A Bakery was dong or trying to do, the staff did not understand how to work
in the new business operations; the whole work environment seemed to be in chaos. The
owners knew they had a great product opportunity but were wondering how best to seize
it.

Management, rather than addressing the operational issues that existed, chose to focus
solely on increasing revenue to increase the value of their company; their goal of
doubling revenues was predominant on their minds. They had no clear financial
information solution to provide relevant cost data or cash flow analysis. There were no
human capital, sales, purchasing, competition or any other operating policies. All
employees acted independently of one another. Morale was low, productivity suffered.
Along with increasing revenues as a corporate goal, one of their value initiatives was
branding. The concept of branding was not fully understood but they knew all successful
companies had a brand and they wanted to create one. Management’s intention was to
change the old and tired B&A Bakery name/brand and create a new one. In the spring
‘97, the Sunderji sons learned branding is not about a nice logo and a tag line; a
successful brand is a corporate philosophy incorporating every aspect of business
operations that translates into the production of a product that customers will be loyal to
and pay more for.

In 3 months the Sunderji sons established their competitive advantage and positioning
strategy, their Unifying Philosophy or UPh; Freshness On Time®. Their UPh exercise
resulted in a new company structure consisting of a parent corporate brand;
BREADSOURCE facilitating their longstanding goodwill to be successfully transitioned
into a new entity. In addition, a retail brand; “B&A Bakery” was retained and a
secondary retail UPh was developed for it; Big Value and Appetizing Taste®. This
redefined the historic B&A adding new life to a name that had a good reputation in the
industry.

The UPh solution helped reposition and revitalize this brand asset because customers
and suppliers knew the B&A name and associated it with good value and quality. The
full cost of the UPh program was $75,000. The two UPh brands were codified into their
information systems, operation policies and corporate philosophy. All corporate
decisions were filtered through how it impacted on “Freshness On Time” or “Big Value
and Appetizing Taste”.

Within one year, after completing the UPh program the youngest son, spearheaded
tremendous change in operations to implement Freshness On Time into every aspect of
how they bake and ship bread. Implementing the UPh included new staff training, new
policies and procedures on distribution, and mixing/baking/packing to consistently
deliver Freshness on Time every time, every day. Full implementation cost was $250,000
over the first year.

The conversion to deliver their main UPh, Freshness On Time, succeeded; customers,
existing and new, appreciated the brand as they disassociated Breadsource with day-old
bread the competition was delivering. By 2003, revenues were $8Million; doubling
revenues were achieved. But doubling revenues does not necessarily translate into
increased profitability and corporate value.

The results of the UPh being successfully implemented are significant:

1. Advanced information system to monitor cost and production in a real time basis.
There were instantly able to get information that would provide accurate relevant
information on cost and production.
2. New production and process controls removed all one day olds from their
deliveries justifying the bakery to charge more per unit for 100% fresh bread.
Wastage rates of 6% reduced to less than 1% thus contributing to the gross
margin increase of 6% by 2003.

3. Customer pricing was once ‘the best deal you can make’ but changed to a
uniform, higher margin pricing schedule contributing to increasing gross margins
by an additional 3% after three years. There were customers that were fired and
revenue did dip in the first year, however, margins increased and net income was
the same.

4. Distribution radius doubled from 200km to 400km increasing the cost of goods
sold by only .05% that were passed on to the customer. The larger footprint
enabled the increase in high value, high margin customers who needed fresh
bread daily.

5. Staff morale was improved due to easier working standards to follow, better
training, improved work culture and ethic and continued investment into the
company’s growth all emanating out of the UPh. This stability and vision gave
employees confidence in the company and their jobs were secure. The cost
savings on recruitment, retraining and productivity through less sick days and less
requested overtime pay was immediate experienced saving hard costs of $25,000
in the first year. Annual increases were lower than projected for staff.

By reviewing the impact of the UPh on the business operations, the 37% industry
average profit margin B&A was achieving increased to over 46% in 2003 solely on the
recommendations of the UPh. The after tax profit margin also increased by almost 10%
denoting a bottom line impact of the UPh.

A company with higher margins has the ability to be competitive in times of recession,
increased competition, supply shocks, etc., because they can be more price competitive
when needed. With a well established brand and customer loyalty, they can be the last
not the first to react to price challenges. This market position clearly decreases risk
within the company.

The full cost of implementing the UPh throughout the business was $325,000. Although
the income recovery of the changes were not fully experienced in the following year due
primarily to decreased sales as the company eliminated over 5% of is customer sales
with the new ‘freshness’ policy. The same level of income was achieved with lower sales.
It was not until the 1999 year where the full costs of the UPh paid back in cash.
However, this is not where the importance of the UPh should be judged.

The analysis of the UPh should be assessed in the same way other expenditures are
assessed; cost versus benefit. The cost of the UPh and its implementation was paid back
in two years which is a good return on investment, however, adding the increase in
corporate value starting from the adaptation to the effects of the implementation also
have to be addressed.

In corporate valuation, there is a similar cost/benefit concept. As one expects the benefit
to increase as the cost does, in the same way if an investment has higher risk we desire a
higher rate of return. A company is valued not only on the basis of the cashflow it
achieves, but also the risk of that cash flow; a risk/return profile has to be determined.

In B&A, not only did revenues increase but they were from higher priced products than
the competition and they produced higher margins as well. Therefore, compared to a
competitor with the same $8 million revenue level, B&A’s revenue were better quality
because they were less risky. This in turn drove up the corporate value.

The analysis of corporate value does not end here. When comparing two companies
based on some key operational criteria:

1. employee morale

2. information systems,

3. human resources policies

4. defined business vision and focus

5. superior credit relationships

to name just a few, if given the same revenue levels, a company that has these
established operational attributes will demand a higher value than a company that does
not have them regardless of what the financial position states.

Operational risk was reduced at B&A through the adaptation of their UPh. Many small
businesses have a 2-3x cash flow multiplier representing a 33% to 50% required rate of
return reflecting the risk associated with the company. If we assume that through the
UPh implementation, in 1997 there could be an estimated 6% decrease in corporate risk
or less required rate of return, this would translate into and additional $675,000 in
corporate value. By 2002, this risk or required rate of return decrease was an estimated
to be 9% lower than in 1997. With the increase in cash flow from higher sales, the
corporate value increased by an estimated $7.8 million; bringing the multiplier to
between 3x and 4x cash flow.

This translates to a two year cash payback and over a 2,200% return on investment in
just over 5 years. The UPh provided increased profitability and lower risk in the
business requiring a lower rate of return. They created a brand that was identifiable.
Using hindsight in the analysis, management now understands that without the
UPh, they would not:

1. Have doubled their revenues as planned.

2. Even considered a plan to increase margins nor believe the UPh could do it.

3. Have avoided bankruptcy if revenues were not achieved.

With UPh, their business succeeded in:

1. growing revenue, profitably despite intense competition and price sensitivity,

2. increasing gross margin 9%

3. increasing profit margin almost 10%

4. reducing company risk by about 10%

5. improving the day to day management of the business

6. enhancing the quality of work life, staff management and customer loyalty
(especially with premium pricing)

7. Improving company EBITDA 250% after five years.

Because the UPh has resulted in improving the quality of revenue and business value,
this business family has achieved a strategy for prosperity regarding the growth and
succession of their business.

Sean is available to provide Trusted Advisors with additional insight on the value and
risk impact of the UPh at sean.cavanagh@navigantconsulting.com.
About The Author

Harish Chauhan is an international corporate and brand strategy

practitioner, educator and the author of Unconventional Business—33
insights on why the classic rules of business no longer work today.

As founder and CEO of Business by Philosophy® and the Unifying

Philosophy strategy (UPh®), Chauhan helps private and family-owned
businesses achieve extraordinary business performance and well-
being. His internationally renowned system successfully overcomes complex, chronic
and systemic challenges facing even the most successful companies.

Since 1991, Harish has created, built and executed over 150 Brand Identities and
established over 40 UPh Strategies for leading private and family-owned enterprises in
Canada, the United States, Bermuda, England and India.

Chauhan presents these successes at leading-edge conferences, courses and workshops

worldwide and delights in mentoring youth and contributing his insights to non-profit
organizations. He presented at the 2006 FFI conference in San Francisco (Decoding the
Family Business DNA). Harish is a graduate of Carleton University, Ottawa with B.Eng.
and B.ID degrees and makes his home in Toronto, Canada.