The headline of this post is a rhetorical question, but it may be the most important one a private company owner could ask themselves because it will likely uncover whether their company is creating enough value for its shareholders.
Answering this question is hard work because it requires an owner to take a step back from their day-to-day work in the business and evaluate it from a more objective point of view. Doing this effectively requires brutal honesty, and it will force the owner to come face-to-face with the key issues that are likely preventing the company from achieving its fullest potential. And while uncovering the parts of the business that need to change may be uncomfortable, they are necessary to confront.
The reason that many owners don’t assess their companies in this manner is that amidst the daily grind of running the business, it can be easy to lose sight of the long-term purpose of the business and why its performance is so critical. In many cases, the principal purpose is to create cash flow for the owners and their families, in order to provide them a good lifestyle. While we have no argument with that short-term goal, we do think many companies can achieve it while also creating substantial value for their owners over time. After all, the stock of the company is often the largest, most concentrated holding on an owner's personal balance sheet. That being the case, we think it a worthy pursuit to focus on the long-term value of that investment and whether the business is creating lasting value for its owners.
This all begs a couple of questions: If you took the invested capital of your company (its net book value) and invested that amount in the shares of a publicly-traded company, what kind of a return on investment would you expect? And perhaps just as importantly, would you view that company’s executives as ultimately being responsible for its stock performance? If your answers to those questions are “commensurate with my long-term goals” and “yes,” then why should you expect anything less from yourself and your management team when it comes to your own company?
This level of accountability requires an owner to separate the various hats they wear as manager, family member, and stockholder (investor). The big key to this is removing your biases about the business (which we all have). This absence of bias is an advantage that professional investors bring to the table when making investment decisions about buying private companies. So when you are able to view your business more objectively – as an external investor would – you will be able to identify areas that need to be addressed so the business can perform to its full potential.
The best and most successful companies we work with have the ability to take this “investor’s view” in tackling the difficult issues in their business and demand adequate returns on their invested capital. It causes them to constantly assess everything – their competitive strategy, market position, people, etc.
If you have not thought this way about your business, now may be the time to ask yourself the difficult questions. The process may offer insights that will substantially increase the value creation in your company.
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