Last week, we reviewed the situation of fictional owner, Joe Davolla. He and his advisors had identified a $1,000,000 gap between the current value of his company, and the value heâ€™d need from it in five years when he plans to complete the transition of his ownership. What Joe needed, and what many owners need is to grow business value, and grow it quickly and sustainably over several years. To accomplish this, owners need to create a written value building plan that they use as a guide path showing what they need to do and how they need to do it.
The best way to identify what you and your company can and should do to build value is to look at what successful companies do. These companies are â€œthe Best of the Best.â€ They are the business owners whose companies occupy the top of the pyramid.
The universe of business owners and business value is similar to a pyramid. The bottom two-thirds of the pyramid (4-5 million businesses) is occupied by businesses that have one or more employees, but whose owners will likely never benefit financially from the sale of their businesses.
While these companies provide an income stream to their owners, these companies cannot be sold or transferred for an amount that gives their owners financial independence either because they are too small or are completely dependent on their owners. The owners of these businesses are their most important employees. Without the owners, these businesses cease to exist.
The middle 20 percent or so of business owners (approximately 2 million businesses) also cannot transition ownership today. If they create a Value Driver guide path and install the Value Drivers they lack while enhancing their existing Value Drivers, they might be able to transition ownership given time, focus and some good fortune. Typically, these owners are still their companyâ€™s key employees.
Since this middle group needs to focus first on building value, we suggest that owners use the Value Driver Analysis we describe below to learn what they need to do and then have a Value Driver Report created so they can follow a growth plan specific to their companies.
At the top of the pyramid (less than 10 percent of all businesses) we find the one million or so businesses whose owners, given effective Value Building, Ownership Transition Planning and enough time, can Transition Ownership successfully. The dominant characteristic of these businesses is that the owners have the ability to become unimportant to the ongoing success of their companies. It is within this group of owners that we find the Best of the Best. These companies possess the characteristics, the processes, and the Value Drivers that all businesses should seek.
Weâ€™ll look at these primary Value Drivers as used by the Best of the Best in the next several weeks, but for now, letâ€™s discuss how we identify which ones are present (or absent) in your company and how we can build value.
Value Driver Analysis
The first step to increase value is to figure out what mechanisms your company already has in place to do so. For example, you may have systems set up to carefully track financial data, but may not have systems to track where customers come from or why they leave. We identify what mechanisms your company employs by asking a number of questions about you and your company. Once you have answered these questions, we create a visual assessment that illustrates both the areas your company is well-positioned to grow value and in which areas it needs work.
Value Driver Report
We use the answers to your Analysis questions as a basis for asking more detailed questions about every aspect of your company. Among other issues, we ask about the systems your company has in place, its means of motivating key managers to increase business value, and how you currently protect the business value you have.
Using your answers to these more detailed questions, we then prepare a detailed Value Driver Report in which we make specific recommendations about how you can grow your companyâ€™s value. In that Report, we include a timetable during which each Recommendation will be implemented along with a tool to hold accountable each of the advisors you choose to implement these Recommendations.
We are excited to offer these value building tools to business owners because we know that for most owners, thereâ€™s a significant gap between what their companies are worth today and what they must be worth upon sale or transfer to finance the post-exit lifestyles these owners desire. We are eager to work with you to figure out if you are facing such a gap, to quantify that gap and to help you close it.
In the next issue of this newsletter, weâ€™ll look at some specific value building activities. If in the meantime, youâ€™d like more information about how we can increase the value of your business, please contact me.