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Best Practices of the Highest Performing Private Companies

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

Best Practices of the Highest Performing Private Companies

I am fortunate to have had the opportunity to work with hundreds of private companies and I’ve seen it all – from the very best performers to those that seem to constantly struggle, and a lot in between. The bell curve is truly at work here. The large majority of private companies fall within the middle (wide) part of the curve, making them marginally better or worse than average. There are very few companies at the far ends of the curve – the exceptionally good or bad performers. Those in the top three percent of the curve – the best-of-the-best private companies – tend to excel in the following areas:

  1. Strategy – Strategy is not just a one day retreat to clarify next year’s plan. Top performing companies spend real time on a consistent basis to consider their strategies, how to clarify them, and how to adapt them to a changing world in which technology is disrupting everything and competitive threats are greater than ever. These companies have the discipline to get their heads out of the details and focus on the big picture items that drive their businesses forward. Strategy is a constant, focused, and intentional activity, not an afterthought.
  2. Culture and Values – Great companies are crystal clear about their core values, which are evident in their cultures and their employees’ attitudes. It is not about posters on walls; they focus on what really matters. And most importantly, their values are exemplified by their leaders that lead by example; they eat their own cooking and set the tone for everyone else.
  3. Market Niche – Most of the highest-performing companies exploit positions in the market that others can’t see, can’t serve, or don’t want, which gives them a competitive advantage. They make tradeoffs about which customers and markets they’ll serve. They do not try to be all things to all people and don’t stray from the place where they have the best advantage. They are disciplined enough to stay in their niche and not take on new business that does not meet their requirements.
  4. Business Rules – The best companies have rules around customer acquisition and the commercial terms they are willing to accept with customers. They know that taking on a new customer is just as much their decision as it is the customer’s. They are discerning about who they will work with, and what margins and commercial terms they will accept. They are not afraid to say no to business that does not fit their customer rules. They can be choosy because they have a very clear and strong value proposition for their products or services.
  5. Focused Execution – Top-performing companies execute at a very high level because they don’t try to do too many things at once. Because they have limited resources, they know that they can only take on so many new things outside of the day-to-day operations and still be effective. They determine what is most important and make executing those items a priority. Most companies have a laundry list of things they can do to improve their business but make the mistake of taking on too many things at once and getting none of them done well. The best companies are apt to work on just two or three critical items and ensure that they are 100 percent implemented.
  6. People – When selecting people, great companies are most considerate of a candidate’s potential fit with their culture. They don’t focus solely on the technical and experiential job requirements. They are not afraid to “deselect” people when they have to. They also don’t shy away from confronting thorny people issues if performance becomes a problem or if someone cannot grow their skills in line with the company’s growth trajectory.
  7. Capital Allocation – The best companies pay a great deal of attention to how they allocate capital after earning a profit. They know that value is created in their business based on its free cash flow – not its accrual earnings. Therefore, they are very discerning about plowing their profits into capital equipment, investments, or acquisitions until they are clear that the return on invested capital exceeds their cost of capital from the investment. They are also careful about not letting their profits “disappear” on their balance sheet in the form of excess inventory and receivables beyond the level needed to support the company’s growth. Great companies generate and keep plenty of cash.

I have tried to distill a great deal of complexity into a handful of ideas here. This list may seem very daunting, even impossible to achieve. But if you asked the best run companies about the items on this list, even they would admit that they still have work to do to get better. That brings me to one final success factor: the best companies are never satisfied with where they are currently. They are focused on continuous improvement of their business. While they achieve stellar results, they don’t rest on their laurels or allow themselves to get comfortable. They are in a constant, dogged pursuit to become better every day, which is probably the biggest reason for their success.

Mario O. Vicari can be reached at Email or 215.441.4600.

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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

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