The Building Business Value newsletter has one purpose⎯to assist midmarket business leaders in their never-ending quest to build better companies. Whether you are the CEO of your own company, a senior manager of a business unit, or a leader in a company that serves those in the midmarket, you will find something in each newsletter to help you serve your stakeholders. Each month we will cover a variety of topics, all focused on leading in the midmarket.
We are very conscious that you spend much of your day buried in e-mail, so it is with your permission that we send this newsletter your way.
|
|
Five More Mistakes to Avoid Making If You Want to Build Superpremium Value
Five Crazy Things CEOs Do
|
Last month we started our list of the craziest things CEOs do and the negative impact these things can have on building value. As a quick review, most companies sell at subpar or par value, meaning that their ultimate price tag is somewhere between three to five times EBITDA (earnings before interest, taxes, depreciation, and amortization). Poorly run companies sell for a smaller multiple, while companies that are run about as well as their average competitors might go for four or five times their net earnings. But just as superpremium ice creams command a higher price in the marketplace, some companies sell for a superpremium of nine to ten times EBITDA. It's like the difference between generic ice cream and Häagen-Dazs.
So the questions are these: Why do some companies command that superpremium price while others don't? And if you are a C-level executive of a $10 million to $100 million enterprise, what do you need to be doing right now to prepare your business for an exit at a superpremium price?
And just as important, what do you need to stop doing?
Here are five more mistakes businesses make that practically ensure subpar valuations when the founders or the C-level executives are ready to exit. Keep in mind, building business value should be the main goal of every leadership team and is not just associated with an exit strategy. So, since building value is your number-one priority, how many of these issues apply to your business?
6. Uncle Joe's still chairman of the board.
The really good midmarket companies leverage their resources, including their boards of directors and boards of advisors. They use these business-savvy individuals as sources of wisdom and as sources of new business. John McBeth, a serial entrepreneur and CEO of Next Century, has a passion for what he calls a "worthy purpose." He keeps himself accountable by leaning on a top-notch board of advisors who aren't afraid to set him straight. In contrast to this, too many small and midmarket companies tend toward boards of directors that consist of friends and family. Perhaps Uncle Joe loaned the company $100,000 ten years ago, so he still wants to run the show. But friends and family who may have been able to pony up necessary start-up funds back in the day are not capable of providing the outside accountability that experienced business leaders offer.
Many midmarket companies struggle with governance. Entrepreneurs and C-level executives need someone to challenge them and offer the guidance and direction necessary for growth. Uncle Joe may have great fishing stories to share at the board meetings, but he cannot mentor the leadership team when tough, challenging business decisions must be made.
There are other ways to fail to take maximum advantage of your board of directors. For example, a company's board members might have personal agendas that lack transparency. Or a board member might try to buy the company outside the stated strategy of the executive team and the other members of the board. Leaders might isolate and disregard board members whose points of view differ from their own. That's why board diversity is extremely useful. Boards not only provide insight, advice, and support to the CEO, their members should have strong industry and financial backgrounds to add real value to CEO decisions. Board members not aligned with the direction of the company are harmful; those with axes to grind or agendas to meet must be culled. Outside directors give business leaders the opportunity to close the books every quarter, position their companies for the future, talk about plans and leadership development, and generally guide the company with the help of other experienced leaders.
7. You are focusing on revenue instead of value.
Midmarket CEOs often get asked "How big is your company?" In American business, size matters. Beyond the preoccupation with numbers and size is a much more important question that is rarely asked: "What impact does your company have in the marketplace?" Is the company a bit player, a role player, or the "leading man" in its market? Typically, business leaders describe their companies in terms of revenue, head count, or plants and equipment. Revenue is an easy answer because that's a scorecard everyone can understand. But when they use this measure, companies shy away from the "value discussion" because value is a much more esoteric concept.
If the average midmarket CEO were asked "What are the five things that make your company valuable?" she wouldn't know the answer. She knows her company has to make money, make payroll, and win more business, but she doesn't know what really makes her company valuable in her marketplace. This results in the tendency to make seat-of-the-pants decisions that are not fiscally prudent. A company might decide to sell a particular product in a market niche, even though no other company is willing to partner with it. Or leaders might decide to keep a line of business going, though it might be smarter to shut the line down and use the resources elsewhere. Know what makes your company valuable to the marketplace and what is core for you.
8. When executives finally do talk about value, they drive everyone crazy.
When C-level executives suddenly start talking about value, they often inadvertently strike fear into the hearts of their executives and employees. If value was never a consideration in the past and suddenly it's a big deal, employees may assume that the management is going to sell the company and they'll need new jobs. They may even respond by quitting. When you do bring up the idea of focusing on the enterprise value of your company, use the language carefully. You don't want people jumping off the pier just as their ship is coming in. Make "value creation" a normal part of your leadership vocabulary.
9. You have no conflict resolution skills.
Many midmarket companies are run by individuals with distinct competencies in a given area⎯for example sales, finance, or technical matters. Often these individuals are not experienced executives who have gone up through the ranks, so they don't always understand how to balance the competing⎯and they really are competing⎯needs and desires of the different arms of an enterprise. Some of these CEOs simply cannot handle the conflicts. Instead, they let them brew until their companies destroy themselves. If no clear direction is given, "ambiguity gaps" are opened. Failure to resolve disputes quickly and effectively is practically a guarantee that companies will self-destruct.
10. The bosses can't take a vacation.
At too many companies, the founders can't take vacations because they haven't figured out how to build effective teams, replicate themselves, or take other important steps in the value-building process. Sometimes it's not that they can't figure out how to build those teams⎯they just don't want to do so.
It's important for leaders to learn how to let things go. Their resistance to this may stem from different root causes. They may have a deep fear that the company will go to pieces if they don't handle everything themselves. The identity of many executives is so tied up in their role in their companies that they have no idea how to back off, take a lesser role, or even leave. One company made an office in the building for the founder, who would come in and do nothing. It's extremely emotional for a business owner to watch someone else essentially rear his child. Letting go requires the ability to bring in new leadership and, when the time is right, to leave. But that's a tall order for most executives.
I'll have five more mistakes to avoid in next month's newsletter.
|
Creating an Organigraph How Organizations Really Work
One of the trickiest jobs of a leader in the midmarket is that of making significant structural changes. Organizations just seem to grow or morph and become an entity unto themselves. What once seemed like a great idea may now be a defunct process or an inefficient division. Structural or organizational changes made during the dot com era or an earlier stage of your company's development may no longer apply. A terrific tool for helping you manage large organizational change is the organigraph, which was originally developed by Henry Mintzberg and Ludo Van Der Heyden of the University of Toronto.
How the Organigraph Works
The organigraph shows how companies really work. It uses symbols like stars, funnels, tubes, links, and chains. In all, six specific symbols represent how a company actually works. You can also make up your own symbols. An organigraph is a very useful way to illustrate how a company works and shows critical interfaces between people and processes.
Executives can use organigraphs to help choose among strategic options much as an explorer would use a map to find alternative routes through tough terrain. The beauty of the organigraph is that it removes personalities from the process. It is "personality independent." It's easier for your staff members to embrace the idea of change if they don't feel personally threatened by it. Paper and approvals can take weird routes through organizations. The organigraph documents how companies really work.
When You Have to Make Big Changes
The creation of the organigraph allows executives to draft a list of what's working and what's not, which in turn leads to the creation of a list of incremental transformational initiatives or things you may need to change to build value in your company.
So if you want to get an honest assessment of how your company really works, try the organigraph. I've used this tool many times, and it never fails to yield great insight and give you, the leader, a chance to make significant organizational changes that will exceed your objectives.
|
|
|
As a business operator, I have been in a position to lead a company during troubled times. Concerns over the direction of the company, sleepless nights worrying about debt and cash flow, high anxiety over closing a deal or a transaction⎯the challenges seem endless. But I've also experienced the highs of leadership⎯the real joy of meeting client needs, the fulfillment of shaping a team, and the satisfaction of watching a vision become reality. As tough as it can be, there is really nothing quite like being a leader in the midmarket.
It is my sincere desire that this newsletter will support leaders in the midmarket as they navigate their way to building stronger, more valuable companies. I welcome your comments.
Sincerely,
Marty
Martin F. O'Neill
Corsum Consulting, LLC |
|
|
|
|
Marty O'Neill
|
|
Marty O'Neill founded Corsum Consulting, which focuses on one goal: helping companies build business value. He is a frequent speaker and consultant on leadership, corporate culture and building business value and is the author of Building Business Value (Third Bridge Press) and the co-author of Act Like an Owner (Wiley). As a business operator, Marty started and sold a company, positioned another for an LBO, and helped a third sell for a significant premium. Marty lives on the Magothy River in Maryland with his wife and three children.
|
Act Like an Owner Owner: Building an Ownership Culture
by Martin O'Neill (Wiley)
Hardcover
List Price:
$39.95
Our Price:
$24.53
Buy Now
 |
|
|
