To start 2022 off, I thought to write about creating value in a business. This topic is not often thought about during many of the stages of the business cycle. It is not often executed well towards the end of ownership, as it becomes apparent that the residual value of the business is what the entrepreneur will end with to make it through their retirement years. Creating value in a business is more than looking at financial statements and making course corrections, rather it encompasses a number of viewpoints and affects all aspects of a businesses’ footprint.
To whom does your business create value? Several groups come to mind:
Which groups in your community rely on your business for funding? Little league sports teams? Contributions to public facilities such as pools, parks and recreation areas? Sponsoring community fundraisers to assist one cause or other? Perhaps you have formed as a B Corporation so building a business while dedicating a portion of it to an allowable cause is what you are engaged in. There are many stakeholders that rely on your business to be a part of the social fabric of the community. It typically is a good business practice to participate at this level and to be recognized for the support given.
Customers and Suppliers:
Volumes have been written regarding the value your customers bring to your business. How many customers, the concentration of sales with each customer, the terms you extend and pricing levels that determine your margins are just a few of the dynamics within the business – customer relationship that creates value. Likewise, with the supplier – business relationships, the terms extended, the quality and reliability of the supplied products are several of the dynamics suppliers are measured by that create the value of each relationship. Great customer and supplier relationships may slightly help create value, but lousy suppliers and customers will certainly downgrade the value of a business.
Certainly a great resource and arguably the most valuable asset of many businesses are the employees who work to create and build the value a business enjoys. As an integral part of a business, how the culture is defined and upheld, how compensation is delivered to each employee for their efforts and what benefits the employees enjoy as part of the organization are critical to retention and building enterprise value. The dynamics of the workforce have changed substantially over the past couple years and those changes will alter the cultural dynamics within companies for many years to come.
Successful value creation in a business oftentimes becomes the central issue when assessing a businesses’ worth when an exit is planned or is forced due to circumstances. Looking at the groups identified in the previous section suggests that value creation is an ongoing additive process that returns great rewards back to the savvy owner group that is managing the business, as it traverses the stages from business creation through transition. This correctly implies that value creation is not a one-off at the end of a businesses travel through the life cycle, so the expectations from entrepreneurs or heirs should not be to wait to try and correct the structural deficiencies developed over time in the short period from need recognition to listing the business for sale.
This in no manner devalues the usefulness of having accurate timely financial statements prepared on a regular monthly or more frequent basis, and to use the statements to assess all aspects of a company’s operations to date. Financial statements are, in many ways, the lifeblood of a company’s ability to recognize performance and to benchmark that performance against industry peers. They are invaluable to use as tools to determine where and how large issues are in a company so that strategic plans accurately reflect the management’s intentions for investing in and correcting these problem areas to improve overall company performance and value over time.
From COVID pandemic restrictions, supply chain problems and disaster occurrences in Southern Oregon, it should not be a surprise that planning ahead for maximizing business value should be a constant activity within a management strategic plan. A first goal for 2022 should be to create a strategic plan for your company that will add value to your operations on a continuing basis over this year. A good strategic plan will include, at the absolute minimum: Goals, Specific Objectives to attain that support the goals, Projects to do that accomplish the objectives, and work tasks that accomplish projects. The plan should be in written form, should be based on an initial assessment of the company’s standing or performance in key areas, and should include performance measures and a timeline to guide the quality of the work during the year.
This is a structured outline for making defined improvements in your business in increments to allow for improvement in performance that will not cause undue disruption in your company’s functioning throughout the year. Implementing this approach with the buy-in of your employees will create value, stability and increase the available resources to reward exceptional efforts from staff.
Marshall Doak is the Director of the Southern Oregon University Small Business Development Center and a huge supporter of innovation and the community that forms around innovation in the economy. In private practice, he works with businesses that plan to transition to new ownership within the next five years, assisting them to build value that can be converted to retirement income when the business sells.
He can be reached through: firstname.lastname@example.org or 541-646-4126.