How Business Owners Increase and Maintain Market Value
by Pat Burke
An NFL prospect’s value is determined by his potential to help his prospective team win. Similarly, your company’s value is determined by the potential and predictability of its cash flow. The more potential and more predictable the cash flow, the larger the multiple of cash flow a buyer will pay for your company.
Sometimes, but not often, there are factors or special circumstances that make a company particularly valuable, such as a patented product the company has yet to commercialize, or a product or innovation that makes a company attractive to a larger company. However, those are examples of lightning in a bottle, and a plan requiring lightning to strike is based more on luck than on any real strategy.
With that in mind, here are four strategic activities every business owner should consider acting upon in order to increase or maintain company market value.
Ensure Long-Term Prospects for Growing Cash Flow are Excellent
This is the key to increasing the market value of your company. Just as NFL prospects train for the specific drills of the NFL combine to increase their draft stock, business owners can work on specific parts of their company to increase cash flow and market value. Specialists—valuable companies, like valuable players, are not generalists, but highly skilled in a specific area. Companies need to use their area of specific skill to develop and sustain a competitive advantage.
If you make the best gourmet ice cream in the market, don’t also try to compete with Dairy Queen. If you are lucky and skilled enough to have competitive advantage, create some barrier to entry (patent, trade secret, etc.). Think of Coca-Cola. Their recipe is more closely guarded than the White House. I once worked with a local bread company who had a sustainable advantage in their extremely healthy and tasty bread. Instead of refining their outstanding breads, they decided to branch off to cookies, coffee, and sandwiches. Pretty soon, the brand became so diluted the company had no sustainable advantage and closed.
Be Strong and Smart
Like a prospective NFL offensive lineman, see if your company can do thirty reps with 225 pounds on the bench press. How? Hire the best people. This won’t be easy since the market is tightening and the best people know exactly who they are. Once you have successfully hired the best possible people, make sure you manage them properly by evaluating them often in order to keep them motivated and, of course, compensate them fairly. The best technique I know for retaining talent is to create a long-term wealth building opportunity tied to a person’s long-term performance as well as the company’s long-term success. It is also critical to protect your investment in your people with an employment contract. This should include a covenant not to compete. Lastly and most importantly, make sure your people can replace you. The less your business needs you, the more valuable it is.
How do you make sure your company is fast? Systems. Systems allow your company to have repeatable success. Without systems, success is based strictly on luck. Your company’s systems should include:
- How you sell your product.
- How you deliver your product.
- How you bill for your product.
- How you collect your bills.
- Creating appropriate hurdle rates for new investments.
- How you treat your clients and customers.
The goal of developing strategic systems is for all your clients and customers to have the same high level of service. Think of a successful five-startar restaurant. The goal of that restaurant owner and the entire staff is to deliver the same excellent, five-star experience to their customers every time. Additionally, there is no way you can grow your business if it is an adhocracy.
All other aspects being equal, the bigger your company, the more valuable it becomes. But, how do you maintain value while growing the size of your business?
- Leverage your competitive advantage to develop diversified offerings.
- Developing products that are in demand by growing demographics.
- Find scalable lines of business.
Your company doesn’t need to be a first round pick to make money and create durable value. However, following these rules will ensure a long, successful, high-paying career and a lucrative exit.