Avoid destroying your company's long term value while you’re chasing next year’s profit

Avoid destroying your company's long term value while you’re chasing next year’s profit
Written by Jim Stewart

Economists are trying to figure out how long and how deep this recession will be. As a business owner I think they’re missing the point. The point is that this recession will come to an end as every one before it has done. That, and the fact that this recession is different from any other, is the only thing we can say with certainty.

Economists are trying to figure out how long and how deep this recession will be. As a business owner I think they’re missing the point. The point is that this recession will come to an end as every one before it has done. That, and the fact that this recession is different from any other, is the only thing we can say with certainty.

While it is taking place, the recession will almost certainly affect 1 of the 2 financial rewards of being a business owner. But, when it is over, it must not have been allowed to affect the second. It will almost certainly result in this year’s profits (and bonuses and dividends etc.) being smaller than in previous years. But it should not affect your ability to obtain a premium price for your business when you sell it once the recession is over – unless you allow it to.

How do you avoid the danger of letting current events erode the value of your company? The first step is to ensure the (strategic) awareness, that the recession will end, influences every short term (tactical) decision you make (i.e. be a Jung not a Nardelli – see the article “Cut Costs like Avon - Not Home Depot”). Keep your long term goals firmly in mind as you make whatever changes are required in the short term. The second step is to continue positioning the business for its eventual sale.

The value in a company lies in its future as a going concern – independent of current ownership. The same things that guarantee that a company has a future - Plan, People, Process and Performance in my language – make it independent of any specific owner. Buyers look at historical financial results in arriving at a valuation for a company. But there’s more to a going concern than the strength of its normalized EBITDA. Informed buyers look for the things that will continue to produce financial results.

Consistent, superior Performance is perhaps the most visible way of demonstrating your company’s potential as a going concern. While the performance during next year and perhaps 2010 may not be what you anticipated only 6 months ago, remember that success is relative. Outperforming your competitors, and growing more quickly than the industry, for example, are tremendous accomplishments in a recession. I knew someone who used to say “Never confuse success with a growth market”. Successful companies perform well in any market.

If your business Plan for 2009 and the following 2 years has not been modified yet this, mid-way through the 4^th quarter, is a good time to do it. Modifying your existing strategies, for example, to put more emphasis on customer retention may be an option. Considering how to finance growth opportunities – resulting, for example, from weakness in a competitor - might be wise if cash flow is likely to tighten and external financing remains tight. But these steps are about changing how you will achieve your vision, not about changing the vision/goals themselves.

Having a planning Process involving the management team – large or small – is one way to show the company is independent of the owner. Most companies have financial, operational and human resource processes in place. But some key processes, for example, a disciplined approach to developing and launching new products or selecting and entering new markets are less common and present owners with opportunities to use them to increase annual profits as well as the value of the company. There are also fewer companies with a well mapped sales process, which would give them everything from better forecasting to higher close ratios, than you might imagine.

Despite the fact that cutting headcount is a quick way to cut costs, this is not the time to let good People leave your company. My definition of “good” prioritizes those who, because of their experience in other growing companies, know what has to be done to add value to yours. A strong culture will drive a company forward regardless of who is at the top and is based on never losing sight of the values and beliefs on which the company was founded. The current situation is also an opportunity to implant strong change management skills and get every employee engaged by asking them to contributing their ideas for implementing the company’s strategies.

Obviously good performance also leads to good Profits. So, remain aware that the recession will end as you make the decisions required to meet today’s challenges. And make those decisions in the context of building the company’s value over the long term. In that way you’ll reap both sets of rewards for the long hours, financial risks and strained relationships that come with the title of business owner.

As usual, to take issue with anything I’ve said – you could argue, for example, that the owners of companies supplying the auto industry couldn’t prevent the recession destroying the value of their businesses - or to share your experiences, send me an email at jimstewart@profitpath.ca or call me at 416-258-9610.

Finally, some shameless self promotion. The partners at ProfitPATH have managed companies through both growth and recessionary cycles. We understand how to maximize the value of a company and we have the experience to know what to do and how to do it (look for our grey hair – well, look for the men’s grey hair). Contact us at growprofits@profitpath.ca if you’d like to have a coffee and discuss your situation.