Business owners often consider transforming their successful businesses into self-running entities when they want to grow their companies. However, they may question whether it is worth investing time and money in the process. In this article, we will explore how company growth can increase enterprisevalue and explain the benefits of transformation.
There are several ways to approach the outcome of a business growth process.
- Employees’ commitment increases if they have clear vision and understanding of the company’s direction and the role they play in achieving that vision.
- A focused business model provides clear focus and makes day-to-day tasks more efficient.
- Improving internal organizational structure increases efficiency and mobilizes unused resources.
- By decreasing the company’s dependence on the owner’s daily involvement, the owner can focus on strategic tasks or potentially pass the company onto someone else.
Overall, company growth can increase enterprisevalue by improving operational efficiency and reducing dependence on the owner. This creates a more self-sustaining entity that is more valuable to financing partners, potential investors or buyers in the future. As a result, the company’s revenue and profitability can increase, creating a higher return on investment for the owner.
How do we measure enterprise value?
Measuring a company’s value can be a challenging task since it involves various qualitative factors that are sometimes difficult to comprehend objectively. Growth can be assessed using surveys to measure the impact of the growth intitative. In my experience it is crucial to conduct them at the beginning and end of a process to get a clear picture. However, even after surveying employees, it may be difficult to determine what it means from a financial perspective if a company’s operational efficiency increases from 4 to 7 on a scale of 1 to 10. It is possible to compare the result to the overall investment of time, resources, and consultant’s fees as well as the cost of missed opportunities.
The best way to measure results is by the increase in the company’s enterprise value. This metric is not only used when preparing for an exit but also expresses how stable, profitable, and sustainably a company operates and grows. It aggregates factors that are results of a company’s growth process.
The goal of the SmartLeap growth program is to increase the owner’s (company) ownership value. By increasing the enterprise value, the company can increase its dividends and/or exit value in the future, benefiting both the current owner and the new owner. This also reduces the company’s vulnerability from their personal involvement. It is essential to understand the fundamental correlations of a company’s maturity assessment to achieve these goals.
What can you do as an owner to increase enterprise value?
As an owner, there are many things you can do to increase enterprise value. Similar to any investment, the value of an enterprise is determined by its future ability to bring in money for its owner(s). This ability can manifest through dividend payments or by selling the company to a buyer who can generate an increased amount of revenue. By calculating the future money-generating capacity to current time (present net value), we arrive at the company’s value.
To increase a company’s money-generating ability, there are several areas that can be improved:
- Providing more value to customers may increase their loyalty to your products/services, allowing you to set higher prices while steadily increasing revenue from year to year.
- Better company operations can reduce costs and increase competitiveness, leading to better profitability.
- Investing in new resources can increase operational efficiency and boost the company’s ability to generate money.
- Ensuring growth for a longer period of time while minimizing business and financial risks through a stable and sustainable business model can make the company more viable and increase its ability to generate money for its owners over time.
By focusing on these areas and continually improving your company’s ability to generate money, you can increase enterprise value and secure a better return on investment for yourself and other stakeholders.
Without taking a deep-dive into the mathematics of enterprise value calculation, two important factors need to be addressed:
- To understand how enterprise value can increase, it’s important to focus on the future money-generating capacity, rather than its current operational effectiveness. This means that successful growth may not necessarily impact profitability in the short term, but can significantly improve the enterprise value in the long run. While every change comes with additional costs and frictions, the creative energies unleashed during the transformation period can contribute to the company’s future profitability.
- However, a company’s growth process can only increase its value if certain changes take place as a result. These changes include
- an increase in operation profitability,
- projected growth rate of income and annual revenue,
- expansion of the company’s growth time period,
- decrease in business and financial risks.
The table below illustrates the steps of a company growth process on the left side, which should be implemented in a way and order that suits the given company best. The right column shows the factors that influence enterprise value, indicating the step that has the most significant impact.
| E2E Leap Steps | Factors driving enterprise value |
| Determine core values and vision | Predictable and stable business model |
| Build strategic vision | Creating a stable business model |
| Optimize organizational structure and have the right people in the right seats | Improved efficiency |
| Reengineer processes to increase effciency | Improved efficiency |
| Strengthen employee commitment and empowering ownership attitude | Increase customer value |
| Establish ownership control over daily operation | Reduced business and financial risk |
| Unified leadership culture | Greater efficiency |
| Improve teamwork and cooperation | Creating as many values for customers as possible |
| Strengthen of organizational learning capacity | Longer growth period |
Each situation is unique, and the success of implementing changes to a company’s growth strategy will depend on factors such as the company’s market position, the dedication of its owners, and the readiness of its employees. For this reason it’s difficult to predict the exact value that will be added. Owners may consider involving a professional to measure the change in enterprise value.
To illustrate, let’s look at one of our clients with whom we’ve been working for over 1.5 years to achieve sustainable business growth. Within a year, we were able to increase their annual sales revenue from 1,2M EUR to 2,4M EUR. As a result, the company’s profit increased from 260K EUR to 420K EUR , and their dividend-paying ability also increased by 110K EUR . This is a significant achievement, but it’s important to examine its impact on enterprise value.
Assuming the company can maintain its increased dividend-paying ability for 10 years, along with a 15% return rate, the 160K EUR profit increase can grow into a 530K EUR increase in enterprise value. While this amount doesn’t go directly to the owner’s bank account, it will increase the expected present value of future dividends. It’s essential to compare this 530K EUR to the amount invested in business growth before making a business decision on whether it’s worth transforming your company into a self-running enterprise, despite the challenges.
