Corporate Value for the Private Company

Corporate or shareholder value is a concept closely identified with public companies. Value of a public company is measured by stock price. The price of a stock reflects a public company’s past earnings but also takes into account the value seen by analysts and the market in general of the company’s industry, competitive position, growth potential and management. While private companies are happily free of the pressures of the public markets, they should not ignore the lessons that they can learn by looking at their own companies from a value perspective. There are two good reasons for this.

First of all, value is an important metric for success. Everyone accepts financial results as “a” or even “the” critical measure of a company’s success. But, as every businessperson knows, financial results are a measure of past performance and tell only part of the story. Future performance and value are dependent on the dynamics of a company’s market, the strength of its competition, the changing needs of its customers, its strengths as well as its weaknesses. Seen this way, corporate value is really just a way of measuring and focusing your efforts to maximize your future success. [Michael’s column this month gives you an exercise on how to identify and improve your company’s value drivers.]

Secondly, value is critical to your exit strategy. Every private business owner or shareholder must eventually make an exit of one kind or another. For most owners, the anticipated exit value of their investment in their company represents a significant portion of their personal net worth. The value that you will receive for that asset will be based, in large part, on how well you have built value that is attractive to potential buyers, investors or successors. Planning is the best way to preserve and maximize the value of this investment. Even a family succession exit strategy should focus on value—the factors that influence value are tied to long-term success, which is clearly the goal for the next generation’s ownership.

A more detailed discussion of our ideas on building value is in an article I recently wrote for Mergers & Acquisitions magazine, “Exit Payoffs for the Entrepreneur.”

-Mary Adams (adams@trekconsulting.com)

• Critical Value Factors
• Industry Ideal for the Value Factor
• Your Company’s Present Status
• Action Steps to Improve

Spending time to identify the right list of value factors is the key to the success of this exercise. This list should include all the basic categories of value from the perspective of an acquirer: client parameters, products/services, industry dynamics, competition, personnel, marketing, sales, operations, and administrative. Under each of these categories, you should identify more detailed drivers of success.

You need to be painfully honest about what the ideal is in your industry for this value factor and where you measure up against that. The final step always has to be action. You will not build value unless you come up with specific action plans to move your company closer to the ideal.

This is a relatively simple but incredibly powerful tool to get you on the road to increased corporate value. To see an example of how this can work, view this sample corporate value action planning table.

- Michael Oleksak (oleksak@trekconsulting.com)

• Deliberate strategy, which is “conscious and analytical,” is based on hard data and numbers.
• Emergent strategy, which is experienced-based and experimental, is based on pattern recognition and learning what works.

The authors also suggest that managers of emergent businesses should be impatient for profits and patient for growth, which should provoke more than one discussion in the VC world.

This book is a great contribution to the field of innovation. It is especially valuable for those of us who struggle to balance the art and science of management in our drive to grow our businesses.

For more information, visit the book website: www.theinnovatorssolution.com.