Managing a successful business requires consistent drive and ambition to create long term shareholder – or ‘capital’ – value. However, the definition of value for one business will naturally be different to another. This means the starting point for any discussion around creating value needs to first identify what value means in the specific context of the business and its strategy.
Shareholder value is not just about business profitability. It be impacted by a broad range of characteristics, including market sentiment, the quality of a business’s assets, its financial performance, the level of debt and the profile of its customer base. For example, being over-reliant on one large customer can bring the value down, whereas a positive factor such as owning the intellectual property associated with goods or services, can increase it.
It’s important to also consider the key drivers of business performance, such as the strength of the management team, the quality of the product offering, market position, the efficiency of the business operations and the primary business model operated. These combine to magnify the effect of the factors already in place, and the difference they make to total capital value calculation can be substantial.
Starting the conversation
For most privately owned businesses, there are three common strategic situations which trigger crucial conversations around value, even if value has not explicitly been discussed previously:
1) Growth and expansion
2) Exit planning for a future sale
3) Transitioning the business to the next generation
If the strategy is to build up the business for a sale in two or three years’ time, for example, value means getting the optimum exit price of the business. However, if the strategy is to make sure the business is in the best possible shape to pass on to a family member, value might be more about ensuring the systems are robust and the right operational structures are in place to ensure longevity and continuity. When discussing value, clearly identifying that strategic intent upfront is vital. It becomes a guiding star. Something owners can stay focused on throughout the natural ups-and-downs of putting the business strategy into action.
As valued advisors to business leaders around the world, it’s our role to help business owners ensure their definition of value is aligned with their longer-term strategy. By creating space for owners to think, and helping them to step back from the day-to-day and focus on their longer-term priorities, it becomes easier to articulate what value means. In addition, our sector expertise can also be crucial not only in helping to define value in the context of the strategy, but also in developing the levers to deliver that value and in benchmarking a business to measure if your actions are driving value.
So how to create value for your business in practical terms?
Turning strategy into action
Once value has been defined, the next step is to identify the operational actions or value levers required to deliver this goal, linking back to the overarching strategic intent and strategy
Strategic Intent > Strategy / Value > Actions / Value levers
At Mazars, we support you to develop your strategy using our Optimize platform. We’ll work together to explore how strategic planning will drive the value you wish to achieve, identifying weaknesses and improvements, and developing the value levers required to deliver priority objectives.
Of course, the definition of value is not a static exercise. Value may change over time as the strategy of the business evolves. Your business may move from a pure growth strategy to an exit strategy and the value levers to deliver that will change accordingly. Revenue may need to be rationalised, costs cut, client lists trimmed, for example. Once you start implementing the appropriate value levers, it is essential to keep monitoring and measuring performance, to make sure these levers are actually delivering the intended outcomes.
Growing in value is unlikely to be a smooth upward performance curve, so it is important to stay focused on the longer-term strategic intent and not get distracted by short-term ups and downs. If the levers include transformative activities, like investment in new capital assets or closing a site, those activities need to be properly costed outside the business’s working capital/P&L in order to facilitate proper measurement and monitoring. It is also important to give strategies and actions enough time to show results. It’s not a case of implementing the strategy and then waiting three years to see if it has achieved the desired objectives - build regular check-ins on how it’s performing, what’s not working, what can be improved.
Ultimately, there is no stock answer for what value looks like for a business. Just as every business has its own strategy, every business will also have its own definition of value, which will dictate the levers it requires to succeed. However, clarifying the value you wish to achieve and identifying the right strategy to help you do so is critical in achieving your strategic intent, and ultimate business objectives.