Top 5 Value Drivers and Value Killers of a Business
A few years ago I went to a professional group meeting. The topic was “value drivers” and “value killers” of small companies. There was a very qualified panel of experts (I don’t remember who they were at this point – sorry about that panel members), but if memory serves, they were entrepreneurs, investors, business valuators, and other M&A experts.
I took notes on the key takeaways. I found them very thought-provoking and helpful when evaluating the state of a business. Disclaimer – this is not the “be all, end all” reference for evaluating the state of a business and its future potential. But it does provide relevant criteria that can stimulate and contribute to any business assessment process. Agree, disagree, adopt, adapt, or revise the lists or items on the list, but I hope they inspire thinking, discussion and action. I am eager share it with you along with my feedback and observations, all intended to help you improve your business.
Top 5 Value Drivers
- (Effective) Management. Presence of a deep, diverse, capable, and effective management team. Of course.
- Differentiation (other than price?.) This is very difficult to achieve unless there is a proprietary IP. Having a distinct offer and value proposition that is clear and genuine is often the best we can do. But, an unmet or under-met need combined with a differentiated offer and value proposition is a valuable position to achieve. High demand and scarce supply – a good situation.
- Opportunity to have positive impact. This seems obvious. It is hard to imagine a business that doesn’t at least have an opportunity to “have a positive impact.” My first reaction is “positive impact” on its customers. This may overlap with “differentiation.” Expanded, it could be applied to having a positive impact on all stakeholders, including employees, investors, vendors, creditors, service providers, as well as customers.
- Appropriate asset base. I think pretty explanatory. Does the business have the assets to consistently deliver on your differentiated value proposition?
- Steady-stable cash flow. Does the business operation generate consistent, sustainable positive cash flow? Again, seems an obvious criteria. Perhaps it should be higher on the list. Unfortunately, it is uncommon for a lot of small businesses.
Top 5 Value Killers
- (Ineffective) Management. Too many owners and leaders of small businesses do not use meaningful criteria recruiting their management teams. Rather than focusing on capability, character, purpose, attitude, and values, owners often default to personal preference, preferring those who they find likable, those that seem similar to them, or those who were effective at performing a functional role and assume that transfers to being an effective manager. Once hired and in place, too often owners or leadership don’t practice effective performance management, including termination where appropriate, creating a significant long-term drag on the business.
- Exposure to fundamental risk that can’t be addressed. This seems self-explanatory and obvious. But perhaps the meaningful aspect of this issue is assessing “can’t.” Most often, when “the right things” are not done, it is by choice, and not inability.
- Inability or unwillingness to develop or stick to plan. Again, self-explanatory and obvious. Sometimes this is an owner-leadership issue, indicating their lack of value placed on planning, or their impatience with the “planning, implementation, execution and getting results” process. And sometimes it indicates a management team’s ineffective planning and execution, despite effective planning and execution being a core competency of management.
- Inability to answer the question “why?” when asked about what happened to the business. It is not enough for owner-leadership and management to know their financial results. It is not enough to know what is done and how it is done. What needs to be known is the relationship between what is and how it is done with financial results. This “value killer” is unexpectedly common.
- Customer concentration. I think specific acceptable or preferred customer concentration varies between different industries and businesses, but achieving a balance of “flagship” customers and a broad base of smaller customers is critically important. Effectively allocating resources to continually strengthen and grow those flagship customers while also effectively acquiring and developing additional flagship customers can be challenging.
Not included in the top 5 lists, but the subject of a lot of discussion, was the impact of “founders syndrome.” The panel observed that many founders-owners do not:
- Realize gaps in their business. It is almost impossible for owners, who are often so close to their business, for all the right reasons, to maintain an objective, comprehensive, accurate perspective on their businesses.
- Delegate effectively. Whether it’s fear of losing control or power, or that things won’t get done as well or the same way they would do them, this can result in the business being limited by the limitations of the owner.
- Recruit uniquely capable, qualified management. Recruiting and retaining ineffective management can be very expensive and potentially crippling limitation.
Perhaps “founders syndrome” should be a top 5 “value killer?”
Do these lists help you assess your business? Does your list reconcile align with these lists? Again, my intention for sharing this is to disrupt your status quo and inspire thinking, discussion, and action that lead to increasing the value of our business.
And please call upon me with questions, objections, other feedback, or to explore how we can work together to achieve your success.
To download or print: Top 5 Value Drivers & Killers 20160616-2305