“There is no secret. Success is the result of preparation, hard work, and learning from our mistakes.” – Colin Powell, former US Secretary of State.
Nothing provides more accurate information about a company’s true value than the market. As a business owner, it is worthwhile to take measures that increase your company’s value regardless of whether you intend to sell your business. We will explain what measures to take and why not to leave them until the last minute! Here are some practical tips if you want to get the most out of your business!
The rules of increasing enterprise value are as straight-forward as the moves in a game of chess. Conscious position-building begins early on in both cases.
As a business owner, your enterprise is as important to you as your own child. This is entirely understandable, as decades – and in some cases, half a lifetime – of work is invested in the economic organization, and in its success.
At this point, I would like to raise a contradiction that is hard for me to comprehend. While owners in general feel strongly about their companies much like you do, the majority of them do not take steps to consciously make their company as valuable as possible. They do not aim to make it attractive to potential – or imaginary – buyers.
Yet these measures are not only important in case you are planning an exit! Taking steps towards increasing enterprise value results in more predictable, transparent, and risk-free operations. They simplify the daily lives of you and your colleagues in a growing company.
Sounds good? I’ll tell you exactly what you need to do to achieve all of this, but first let’s discuss another crucial factor: time!
The time factor
Since the turnaround time for value-enhancing transformations can be as long as two years, it is crucial not to wait until the last minute. Even the greatest effort will be ineffective if there is not enough time for its impact to be felt. And we haven’t even begun to discuss what happens if an owner does nothing.
A friend of mine recently sold his company. However, he did nothing to generate greater demand for his business. Nor did he carry out the transformations that could have reduced the acquisition risks for potential buyers.
The company was sold for less than half of what the seller could have received if he had “done his homework”. A business with an annual profit of 500K EURmissed out on a potential revenue of 1M EUR. What a shame!
The case is slightly better for companies that are preparing for an exit but leave transformation to the last minute. They try to improve the operation of the company with a transaction advisor three to six months before the sale.
In technical terms, this is called “window dressing”. It refers to making financial statements more transparent, reducing legal risks, and a host of other operations that are fundamentally useful, but not sufficient for true transformation. However, a serious buyer always looks beyond the window dressing and mercilessly prices in the shortcomings…
If you are slow or do not take action, potential buyers in the market will undervalue your company to the greatest possible amount. It is therefore crucial not to start value-enhancing changes at the eleventh hour, as these may take one or two years to complete.
Remember: by taking action, you make your company more competitive, regardless of whether you plan to sell the business or not. Let’s take a look at the most effective main value-enhancing measures.
- Build a management team
The most defining element of enterprise value is whether the company can maintain its business effectively without the presence of the owner-CEO. Without competent and independently operating managers, the owner is the sole guarantor of business success, and the company’s growth without them is highly questionable in the future.
And since you – as the owner-CEO – are not for sale, an informed investor may reduce the offer value for a company with micromanaging owners. They may also insist on your continued involvement even years after the transaction. It may also be possible that payment for a portion of the purchase price is tied to your continued presence. I have already built management teams in quite a few companies. It takes roughly two years. I have heard “this can be done faster,” but in my experience, it always takes around two years. Recruiting the right professionals is one thing, but allowing them to form a cohesive team and for the individuals to truly understand their areas of responsibility is another. From this point forward, however, value creation moves at the speed of light.
- Improve transparency, establish controls, and develop individual performance metrics!
By improving your company’s performance transparency, establishing controls for management, operations, and finance, or setting individual performance metrics you are, not only making your company’s performance trackable for a potential buyer.
Selling your company doesn’t need to be on the table in order to take a step towards transparency. It will bring you great value. As an owner-CEO of the company, you will be able to make good decisions if you have a clear picture of your company’s financials. For example, financial statements and KPIs that evaluate business performance will help you recognize at an early stage if the costs of an investment are getting out of hand or if the introduction of a product is not likely to bring the expected results.
- Develop a vision and growth strategy and make your results presentable
It is even more attractive to your “clients” if your company has a growth strategy and a realistic vision. This provides evidence that there is potential for your business in the medium and long term.
Of course, the growth strategy should be supported by product or service development ideas, which may be ambitious, but grounded in reality.
Companies that plan and implement their growth strategy stand out from the competition in the eyes of their partners, financiers, and investors. For a medium-sized enterprise the difference in their market value compared to their competitors can be measured in millions..
Summary:
Transformational changes that increase the enterprise value are worthwhile even if you do not plan to sell the company. in the market. These are systemic innovations that will give you peace of mind.
However, it is worth starting these changes early on because they are time-consuming and their effect may not be felt immediately due to their nature.
As a result, your business will operate more predictably, transparently, and with less risk than before.
What should you take away from this article?
- It doesn’t matter if you want to sell or not; sound actions that grow enterprise value will make for a better business.
- Do not delay making changes, take action in a timely manner.
- Build a management team that is competent to lead your company.
- Improve the transparency of your company, develop controls and performance indicators.
- Develop a vision for your business and make your results presentable..
