This article originally appeared in the September 2016 issue of Smart Business Philadelphia magazine.
Many private company owners lose sight of the importance of the returns their business generates based on the capital they employ and the risks that they take. The chief reason for this is that the business becomes a “lifestyle business.” Its principal purpose is now to support the owner’s lifestyle rather than to function as an important asset that is growing in value. This lifestyle view can come at a significant cost to an owner in terms of lost business value. When you view your business as an outside investor would, it can create more value over time.
“Taking this perspective requires the owner to change the way they organize and view the business, and the way they measure how the business is performing,” says Mario O. Vicari, CPA, a Director at Kreischer Miller. “This all takes discipline and effort. However, given that the business is the largest personal asset for many owners, the effort is worth it.”
Smart Business spoke with Vicari about the value of taking an outsider’s view of your business.
How do you evaluate your company with the perspective of an outsider?
To take an outside investor’s view of your company, start by asking yourself the following question: If your company was for sale, would you be willing to buy it based on its current state of performance? And how much would you be willing to pay? Asking yourself this rhetorical question will give you a more objective view of how your business is performing and what changes are needed to boost its performance and create more value for the owners.
In answering this question, it’s helpful to understand how third-party buyers evaluate private companies. These investors have a singular focus on returning as much capital back to their investors as soon as possible. So every decision they make is based on whether the business will generate an increase on their return on invested capital. While there are some limitations to this approach if you focus too much on short-term results, taking this ‘investor’s view’ can be very instructive when applied in the proper context.
What are the key areas to focus on in order to take an outside investor’s view of your company?
Bias — Remove your biases about the business, how it works and how it is organized. Take a fresh, objective view and organize it in a way that makes sense, without getting caught up in how things have been done in the past or who does what.
Strategy — Invest serious time to develop and refine the company’s strategy and business model. If your strategy is wrong, your company will never achieve its full potential.
Goal Accountability — After your strategy is developed, establish clear goals and hold people accountable for achieving them. Create incentives for achieving important goals, as well as consequences for when goals are not reached.
People — Make a very honest assessment of all your people, especially those in key leadership positions. The business can only ever be as good as the people you surround yourself with. You have to be willing to make the tough decisions to ensure you have the right people in the right roles.
Governance — If your company doesn’t already have one, establish a board. Private company boards can fill in gaps where the company may need help. They can also instill operating discipline by holding the owners and managers accountable. And they add structure by formalizing the reporting and accountability processes of the business.
Financials — Increase the value you get from your financial reporting so that it becomes a strong decision-making tool. Upgrade your financial reporting requirements so there is increased visibility on what is happening in the business along with an emphasis on proper allocation of capital to achieve a hurdle rate of the returns on invested capital. ●
You may also like: