Summary

Growing the value of a business has the twin benefits of creating a business that allows you to sleep better at night, and increase the chance that the business will outlive you. This requires focus beyond just growth, developing elements of the business that are hard. Use this simple tool to diagnose where you need to start building the business for real value, and allow you to leave a legacy.

The Problem

Many business owners work hard to grow their businesses, to generate greater sales and profits. Sooner or later though, they end up realising that this approach – focusing principally on growth – is not enough.

For example, take two businesses, with the same sales and profit, but one with entirely recurring revenue, and one having to wipe the slate clean and make new sales each month. From an investors’ perspective, these two businesses will have very different values. This is an example of Shareholder value vs simple size.

I learned this lesson the hard way. I had a business for several years that I enjoyed, felt a strong sense of purpose for, and that was consistently growing year on year. I never gave much thought to exit or how I would hand it over. But personal circumstances overtook me, and I found myself in a position to have to sell it, without the company really being ready. The sale didn’t realise the full value of that business, and within 6 months the brand was gone, the team dispersed, and the clients all folded into the acquirer.

We all reach a point in life where we have to think about legacy – what are we going to hand over when our work is done? Sometimes this happens when we’re old enough to retire, and sometimes, as in my case, much sooner. Even if this date is a long way off, the things that an investor would look at in your business are the same ones that will grow value for you – it’s about maximising the company for Shareholder Value, which important, because:

• allows you to pass on the business, and leave a legacy that outlives you
• allows you to realise value (i.e. make money) from years of risk and investment
• if shared, can do the same for your team (and motivate them towards the same outcome)
• the actions to improve Shareholder Value bring benefits that can be summed up in the phrase ‘allow you to sleep well at night’

So why don’t more entrepreneurs have a stronger focus on building Shareholder Value? What we see again and again are the following reasons. Do any apply to you?

• The voice of Shareholder Value is a minority. The owner(s) of the business may be the most influential and powerful people in the company, but their voice often gets drowned out by day-to-day demands of the market, customers and staff.
• Lack of understanding of what drives Shareholder Value. Most entrepreneurs only sell their business once in their lives, so don’t have the knowledge and experience to understand what investors look at and value in a company.
• Lack of capacity to work on it. Projects to drive Shareholder Value often fall into the ‘Important but not Urgent’ category. For entrepreneurs it is hard to get out of the gravity well of working in the business and not on it.
• The actions to really grow Shareholder Value are hard. Many of the things on the list are really difficult to achieve, to the point where they may feel ‘intractable’.
• Fear of talking about ‘exit’. Any conversation whose ultimate purpose is to work towards the exit of the Founder brings anxiety, both for them and the team. It can be difficult to message such initiatives as being for the common good.

How to fix it? – The Shareholder Value Checklist

Let me be clear – it takes years to really grow Shareholder Value. Even if you have the notion to sell the company ‘in a few years time’, the process of development must start now.

It also pays to take others on the journey with you, having key members of the team (or even the wider team) incentivised by shareholding rather than just sales or profit will align incentives, and create a sense of ownership.

The process is simple (but not easy):

1. Arrange a session with the management team to ‘set a strategy that focuses on building a valuable business’. Wording such as “Together we’re going to look at and tackle some of the challenging issues which, if solved, would allow us to build a business we can all be proud of, and that can leave a legacy.”
2. Have each member of the team score the items on checklist below, assessing how well we are doing today at each one. Then discuss, which of these should we focus on improving first if we want to significantly grow the value of the business?
3. Plan out a Priority project to deliver that Quarter, and get in the diary check-in meetings every week to review progress and solve issues along the way. Be sure to set timelines and accountability for all the key milestones of the project.
4. Repeat this process each Quarter, and as you improve these scores, you will massively grow the value of your business.

If done right, some of the initiatives you choose will take time, and may require significant investment to achieve. For example, transitioning to recurring revenue, or diversifying away from a single point of failure are really tough things to achieve if not there already. The key is to keep setting objectives and planning out projects each quarter. That habit breaks down an ‘insurmountable’ objective into achievable sprints.

What will happen during this journey, is that your mindset will shift from being a manager of your business, to being an owner / investor. You will start to realise that investing back into the business in key areas will end up paying dividends, and you will start to see each project in terms of ROI, with the “R” being measured in shareholder value.