Archive for February, 2010

Don’t Destroy the Long Term Value of Your Company……

Friday, February 26th, 2010

The economists are still trying to figure out how long and how deep this downturn will be. As a business owner I think they’re missing the point. The point is that this downturn or recession will come to an end as every one before it has done. That, and the fact that this one is different from any other, are the only things we can say with certainty.

There are 2 types of financial reward for being a business owner and, while it is still with us, the recession will almost certainly affect 1 – annual profits. For some companies they (and the bonuses and dividends that result from them) will be smaller than in previous years. But the recession should not affect the second reward – the ability to obtain a premium price for your business when you sell it – unless you allow it to. 

How do you avoid the danger of letting current events erode the value of your company? The first step is to ensure the (strategic) awareness that the recession will end influences every short term (tactical) decision you make. Keep your long term goals firmly in mind as you make the changes that are required in the short term. The second step is to continue positioning the business for its eventual sale.

The value in a company lies in it’s future as a going concern – independent of current ownership. The same things that guarantee that a company has a future – Plan, People, Process and Peformance in my language – make it independent of any specific owner. All potential buyers will look at historical financial results in arriving at a valuation for a company. But there’s more to a going concern than the strength of its past, normalized EBITDA. Informed buyers will look for the things that will continue to produce great financial results in the future.

Consistent, superior Performance is perhaps the most visible way of demonstrating your company’s potential as a going concern. While the performance during next year and perhaps even 2011 may not be what you anticipated only 18 months ago, remember that success is relative. Outperforming your competitors, and growing more quickly than the industry, for example, are tremendous accomplishments in a recession. Successful companies perform well in any market conditions.

If your business Plan for 2010 and the following 2 years has not been modified yet, this is a good time to do it. Modifying your existing strategies to, for example, put more emphasis on customer retention may be an option. Considering how to finance growth opportunities – resulting, for example, from weakness in a competitor – might be wise if cash flow is likely to tighten and external financing remains tight. But these steps are about changing how you will achieve your vision and goals, not about changing the vision/goals themselves.

Having a planning Process involving the management team – large or small – is one way to show the company is independent of the owner. Most companies have financial, operational and human resource processes in place. But some key processes, for example, a disciplined approach to developing and launching new products or selecting and entering new markets are less common and present owners with opportunities to increase the value of the company. There are also fewer companies with a well mapped sales process, which would give them everything from better forecasting to higher close ratios, than you might imagine.

Despite the fact that cutting headcount is a quick way to cut costs, this is not the time to let good People leave your company. My definition of “good” prioritizes those who, because of their experience in other growing companies, know what has to be done to add value to yours. A strong culture will drive a company forward regardless of who is at the top and is based on never losing sight of the values and beliefs on which the company was founded. The current situation is also an opportunity to implant strong change management skills and get every employee engaged by asking them to contribute their ideas for implementing the company’s strategies.

A flexible plan, wide spread use of well thought out, documented processes and people who can implement both of them will drive great performance – which will lead to great Profits. So, make the decisions required to meet today’s challenges in the context of building the company’s value over the long term. In that way you’ll reap both sets of rewards for the long hours, financial risks and strained relationships that come with the title of business owner.


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