Value creation and value capture, even if closely related, are two distinct aspects that play both a fundamental role in, for example, designing a new business model or undertaking a process of business model innovation.
When we talk about value creation, we are referring to the extra benefit that is derived from the transformation of raw inputs to final products.
Creating value is an essential part of supporting a profitable and lasting business. It helps sell products and services to customers, thus maximizing profit; internally, it contributes to employees’ higher efficiency and, ultimately, in increasing stock prices for shareholders.
On the other hand, capturing value refers to your capacity as a company to retain the value generated (value creation) for yourself, as your retained profit.
Benjamin Forestier, a lecturer in Corporate Finance, Private Equity, Financial Policy, and M&A at several prestigious business schools in France, has shared with us his take on the difference between value creation and value capture.
Creating value does not equal to capturing value
We all know the famous equity bridge in which you can decompose a buyout multiple on invested capital (MOIC)/internal rate of return (IRR) into sales organic growth/M&A/EBITDA margin improvement/deleveraging and multiple expansion components. Usually, we claim that everything which is not deleveraging nor multiple expansion equals “value creation”.
Allow me to be more nuanced and introduce the concept of “value capture”. In a buyout, there are numerous stakeholders involved: customers, suppliers, employees, sellers (for buildup), the State and the banks. Let’s see the difference between value creation and value capture for some of each stakeholder.
If you increase the price of your solution while leaving the quality unchanged, does it mean that you create value? No, what you are doing is capturing value from your customers.
Same thing if you decrease volume (the so-called “shrinkflation”) or quality (low-cost outsourcing) while keeping the price constant.
Value creation for your customers, for example, is when you deliver a new product, or enter a new geographical market, or you widen the gap in customer value/price.
If you put pressure on unit price and payment terms without any compensation, it means that you are capturing value to your suppliers.
Value creation is when it is not a zero-sum game between you and your suppliers. Reverse factoring, for example, is an excellent win-win situation.
If you fire 10% of the workforce and the remaining has to take the burden without a process reorganization, you are basically capturing value from your employees.
The same thing if you underpay them or if you expand the working hours/productivity pressure without any compensation.
You create value when you reorganize the process, you automatize with digital tools all the “low value” tasks and so your employees can focus on what is critical for the business
If in a buildup you buy at 5x EBITDA and you resell at your platform multiple of 10x, while you made no synergies, then you are not creating value. You are just capturing value from the seller.
On the other hand, if you did a remarkable post-merger integration that resulted in a lot of realized synergies, well, in that case you actually did create value.
The State and the banks
If you did a complex offshore holding structure to lower your effective tax rate, what you actually did was capturing value from the State.
If, for example, during 10 years, you had bank debt at 7x EBITDA for 3% interest rate, then it means that you captured value to the bank since the rate is not representative of the credit risk anymore.