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”. 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 asset 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? 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 increasing a company’s value. 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 variables that affect the value of a business. 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 and opportunities for increased value missed. If you are an owner or a founder of a company, you owe it to yourself, your family and your employees to have a well thought through Exit and Transition plan. You can read more about our approach here.
Subscribe below to Group50’s blog to stay on top of the latest trending topics
At 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, or call us at (909) 949-9083.
Comments are closed.
- Customer Journey Maps – Identifying Value Through Your Customer’s Eyes
- Digital Technology
- Middle Market Growing Pains
- Does Your Business Have a Robust Social Networking Strategy?
- 5 Reasons Why Strategic Execution Fails
- Doing Business in Mexico vs. China: Strategic
- Why Hire a Strategic Planning Consultant?
- Utilizing Continuous Improvement Tools at the Business Level
- Creating a Personal Exit Strategy
- Doing Business in Mexico: Mexico’s Legal System