Group50’s CEO, Jim Gitney, was recently asked by an executive about how he should manage the division he just took over as its president. Jim told him “Manage it like you are going to sell it – maximize value creation”. The executive gave a strange look and asked why that mattered.
Many leaders think that their only measure of success is the P&L –the amount of operating profit the company generated. Those who believe that are missing a significant part of the picture. While operating profit is an important part of value creation, it is a result of doing many other things that impact value and reduce risk to the owners. The owners of a business (public corporation, PE group, privately held, non-profit, etc.) want to realize maximum value for the assets they own. Therefore, the measure of success for every leader should be value creation.
Maximizing value is about two primary objectives:
- Maximizing earnings before interest, taxes, depreciation and amortization (EBITDA)
- Mitigating multiple risk
Most of us know what maximizing EBITDA is about and can come up with ways to significantly improve it. But, what is this mitigating multiple risk thing? Isn’t that only for private equity firms? What does it mean?
Businesses are typically valued as a multiple of EBITDA. For every perceived risk a potential buyer or owner identifies, the multiple is reduced and so is the company’s value. Mitigating multiple risk is all about managing the key factors that impact the sustainability of strong business performance and reduce perceived business risk. Some of those key factors include but aren’t limited to:
- Customer concentration
- Market share and market potential
- Intellectual property
- Succession planning
- Robust business systems and financial management
- Effective innovation and resultant healthy margins
There are many other variables that affect the value of a business, but these are the primary ones. All leaders should approach their business as if they were the owners and focus on value creation as a primary objective. With that vision, all of the other things will fall in place. Without that vision, the business will be sub-optimized (something we call Anti-Strategy) and opportunities for increased value will be missed. Maximizing business value requires a strategy and a set of tactics that include a focus on the items above and a very focused program on cost takeout.
For more information about creating a business strategy focused on maximizing business value, call us at (909) 949-9083, send us a note at firstname.lastname@example.org or request more information here.
About Group50: We understand mitigating multiple risk, driving profitability, executing to strategy, and managing through major change efforts. We have helped companies maximize their value as executives, project managers, interim leaders and advisers. If you want to jump start the process to maximizing value and mitigating multiple risk, check out our Business Assessment, our programs for Continuous Improvement, Market Effectiveness and Strategic Execution.
- Strategic Planning Playbook
- Virtual Strategic Planning and Strategic Execution
- Navigating Growth Through an Inflection Point
- Managing Your Way Through 2020 and Beyond – Part II
- Market Effectiveness – Marketing That Doesn’t Erode Your Profit Margins
- Post Merger Integration ( PMI ) Playbook
- Supply Chain Playbook
- Change Management in the Current Environment
- Supply Chain Risk – Supply Chain Resiliency – Knowing Where You Are Vulnerable and Doing Something About it
- Re-Opening Your Business – Best Practices Series