Bill (not his real name) came to work for his dad when he was a teenager and returned to the family business following college. He literally started sweeping floors and hauling trash and by the time he left for college had worked in every department of the business. His dad didn’t have a college degree and built the business by sheer grit and determination. When Bill rejoined the company after graduation, his job responsibility was established as “manager” and he had several department heads under his direct supervision.
Bill knew how to serve customers, how to perform every other support activity and felt like his Business Administration degree gave him enough knowledge to be able to effectively lead the company when dad retires. Twenty five years later, Bill learned the hard way that the choices he made as “manager” (and eventually President) did not produce the value that would support his retirement and future.
What happened? Bill never took the time to measure the real “fair market value” or true “market net worth” of the business.
Outwardly, Bill’s company was very successful. Sales grew year after year and he built a family-like culture that cared for and cherished the employees of the company. Bill was a pillar of the community involved in many civic and professional organizations and he hired “the best” local contractors to help him. In fact, his accounting firm even audited his records every year to ensure that his books were solid. His banker was a close friend and he did have some debt and a line of credit, but everyone seemed to be comfortable with the current state of affairs.
Then a surprise came up that changed everything. A new flashy competitor moved into his comfortable market and began to fight him for customers. After a couple of years of struggle, Bill’s attorney suggested he talk with an M/A advisor about selling his company. That conversation quickly led to a valuation of the business and Bill was devastated to learn that there was very little economic value in his company. The factors that made the market attractive to his competitors were the same that eroded his company value: lack of innovation, lack of controls, expanding cost basis, inefficient delivery systems, and working capital growing faster than profits.
Bill thought that his “family values culture” added value because it reduced turnover. That would have been a factor in his favor if he hadn’t been so generous with compensation which was significantly higher than his industry peers. Bill also thought his “pristine business records” were a big value adder, which did work in his favor. They clearly showed the business was growing revenues, but gross profit and operating income were shrinking faster. Bill also prided himself on being at the business “from open to close” and building deep personal relationships with his customers. He had no idea how his lack of delegation factored into the value of the business.
What could Bill have done differently to prevent this outcome? Measure the true value of the business regularly and repeatedly.
This simple exercise may be the most important discipline that an owner can instill on the business. After all, business owners expect that their business will take care of them by providing for the continuation of their lifestyle long after they leave the business. By measuring the progress over time, the business owner is given the ability to see how their choices and actions actually influence the value of the business. They learn what works and what doesn’t and guard against the surprise of bad news when it really matters.
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