Back to Insights

Creating Value in Private Companies: 5 Factors Are Critical for a Private Company to Create Value

Mario O. Vicari, CPA
Mario O. Vicari, CPA Director, Family-Owned Businesses Group Co-Leader, ESOP Group Leader

This article originally appeared in the August 2011 issue of Smart Business Philadelphia magazine.

Private companies that create value have five things in common: They have a strong culture, a specific strategy, clarity in their business model, quality people and they meet certain financial markers that indicate whether the organization is successful, says Mario Vicari, director in the Audit & Accounting Group at Kreischer Miller, Horsham, Pa.

"Decisions about who you are as a company, how you compete, your market position, how you organize your business model and the quality of your team are key factors in creating value for private companies," says Vicari.

Smart Business spoke with Vicari about how these factors drive value and how private firms can position themselves to attract and retain capital.

How does a company’s culture impact its value?

Every company’s view of its culture is different, but ultimately, key leaders should answer these questions: What are you passionate about? What makes you different from other companies that provide similar products or services? What really matters to you at the end of the day? And, how do you make your core beliefs clear to employees? In essence, how do you walk the talk?

Culture and core values set the foundation of the firm and drive high-level decision making. Without knowing who you are and why you exist, a company lacks direction and has a difficult time gaining buy-in from stakeholders, including employees, vendors, clients and end-users. Before you can build a company, you must know what you believe in and who you are.

The highest-performing companies have this written down, and communicate it and live it with their employees. A strong culture is what binds the company together and makes it unique.

Where does a company’s strategy come into play?

A business must know its position in the market and how it can best serve the right customers. How will you compete in the market? What is the definition of a perfect customer for your business? How will you differentiate your company from others in your space? Will you compete based on price or value?

A company’s strategy is often linked to its history and has to do with its core strengths. Identifying what you are really good at and focusing on markets that play to your strengths are critical. Also, the best companies are crystal clear about the definition of an ‘A’ customer and focus like a laser on that target customer. Part of determining positioning is to identify the specific markets and customers you will serve.

It is important to be discriminating in making these choices. The best companies know that they can’t be all things to all people.

Why is the business model important?

The business model represents the way the company organizes itself to fulfill its strategy. Ultimately, a business model answers the question, ‘How will you uniquely fulfill the promise of delivering value to the marketplace?’

It is about how the company organizes itself to execute its strategy. Do you fulfill the promise of what your culture says you should be doing, and how do you fulfill the promise you make to your customers? Once you know who you are and how you will compete, the business model outlines how your people and processes will achieve company objectives.

A business model is the coordination of activities within the business that addresses how you will go to market and deliver value to the customer.

How does a company get its people on board with the culture, strategy and business model?

Behind every strong organization is a group of talented leaders — a team. Often, private companies that don’t grow are hampered because the CEO is the smartest person in the room; they don’t hire people who are better than themselves.

In the best companies, CEOs surround themselves with very high-level skills in critical parts of the company and allow these people to lead. Companies that create value are constantly assessing whether they have the right people in the right positions in the company, and whether each person is delivering his or her maximum potential.

Strong company executives make tough decisions when people aren’t performing. A business cannot execute plans without really strong people, and great companies are not afraid to make a change if key people are not measuring up.

What financial metrics indicate that a private company is creating value?

Ultimately, margins and cash flow drive value. These metrics indicate whether a company has strength in pricing and whether it is managed efficiently. If good margins and returns on sales are produced, the cost structure is solid and the business is likely in a niche where it can compete on a value proposition and not solely on price.

Other metrics that are important reflect efficient allocation of capital — return on equity and return on assets. The best companies can do more with less, and they are careful about allocating capital to get the highest returns on their assets and equity.

Capital is scarce and hard to create in private companies, which is why it is so valuable. The private companies that create the most value are discriminating in their capital allocation decisions.●



Contact the Author

Mario O. Vicari, CPA

Mario O. Vicari, CPA

Director, Family-Owned Businesses Group Co-Leader, ESOP Group Leader

Construction Specialist, Family-Owned Businesses Specialist, ESOPs Specialist, M&A/ Transaction Advisory Services Specialist, Transition/Exit Planning Specialist, Business Valuation Specialist, Owner Operated Private Companies Specialist, Private Equity-Backed Companies Specialist

Contact Us

We invite you to connect with us to discuss your needs and learn more about the Kreischer Miller difference.
Contact Us
You are using an unsupported version of Internet Explorer. To ensure security, performance, and full functionality, please upgrade to an up-to-date browser.