Growing the Value of Your Business

The financial markets are very efficient. Money flows in and out of investments with incredible speed as investors constantly seek to place their money where it will earn the highest yield. All investors are not right all the time, but as James Surowiecki compellingly argued in The Wisdom of Crowds, the “crowd” is almost always right as a group.

What is it that investors value most? Predictability of earnings. Investors pay handsomely for investments that deliver predictable earnings. Add exceptional growth of those predictable profits to the equation and there’s a feeding frenzy. Value skyrockets.

What relevance does this have to you, the owner of a private business far removed from the public markets? Nothing — unless you want to build the value of your business or your personal wealth.

The main differences between your company and a publicly traded one are size, public disclosure of financial performance, a mechanism for efficiently trading equity units, and separation of management and ownership. But just because the world isn’t looking and the shares aren’t trading doesn’t mean that building business value doesn’t matter. It just means that the only shareholder you have to please is yourself — and possibly a few others close to you.

So, here’s the big question. What do you, the shareholder, demand of yourself, the manager? Anything at all?

Do you set standards for financial performance and demand they be met? Rationally allocate your capital to investments that will provide the highest return? Use your influence to push for changes in management in an effort to get a team in place that will deliver results? Prudently move your money out of investments that are underperforming and into investments that offer higher returns?

Neil Schaffer of Longview Consulting Group (www.longview-cg.com) has spent his career building value in private companies. He has diligently studied the art and science of private company value creation. He has worked seven days a week for as long as he can remember in various leadership roles for a varied string of small, medium and large private companies. His vantage points have been that of chief financial officer, president, chief executive officer, investor and owner. He has learned from trial and error, success and failure. He now consults full time on this very narrow subject — helping companies grow value rapidly, even radically.

From my experience, for every 1,000 people who say they consult on areas such as these, there’s maybe one who really knows what he or she is talking about and can drive results.  After all, building a company is not easy, as you know. That’s why the wealthiest 1% of the population controls nearly 40% of all the wealth.

My point is, Schaffer is the real deal. I talked with Schaffer extensively. And here’s what he says about radically growing the value of a private company:

The most important thing is the people, and the most important of all is the business owner himself. We see many dozens of companies each year — from start-ups with a great idea seeking capital to mature companies preparing to charge up the next hill — and we always give great weight to the vision and commitment of the founder/entrepreneur/CEO and to the quality of the management team.

There are many obstacles to building a high-performance (and thus valuable) enterprise — technology risks, financial risks, regulatory risks, etc. But most business risk is what we call ‘execution risk.’ The successful teams are those that develop a first-class playbook and can run their plays against the tough and unpredictable defenses of global markets and competitors, and Murphy’s Law.

Sure, a company needs good products or services that the marketplace values, but superior results and sustainable advantages are driven by what the competitors can’t see and can’t easily copy … an excellent and committed senior team with vision and values that spark the entire organization to high performance.

The good news is, talent can be hired. But attracting and hiring top talent will only occur if the controlling equity holder rejects the status quo and has the vision and the commitment to really building something special.

The light definitely shines on you, the business owner.

So whether your desire is to slowly enhance the value of your business while maintaining a healthy and balanced life, or to radically grow your business and create something significant, the first and most important step is for you to make up your mind. Establish a vision.  Then, when you’re ready to turn vision into reality, this issue of The Business Owner offers strategic and tactical suggestions you can use.