Optimizing Business Value

The medical device and equipment industry has its share of entrepreneurs starting new businesses by developing new products and services, offering them in the market and meeting customers’ requirements and needs. Many of these entrepreneur ventures are developed with the short-term intent of establishing the business, proving the product’s quality and value and maintaining a level of profitability, but more realistically, demonstrating growth in sales volume, customer and product acceptance and use, and then, selling the company to a larger player in the market.

Depending on the value of the product and the development and recognition of demand for the product in the market, the time frame for this cycle to occur could be very short or extend from three to five years. In addition, the revenue base may have progressed from a startup to somewhere between $5 million and $15 million, depending on the product’s success and available working capital to fund growth.

During this time frame, the primary focus of the owners and management is growth, product acceptance, unit sales and cash flow. Assets are acquired, customers are added, and employees are hired to manage and operate the company day to day. Suppliers are being selected to purchase materials, parts, supplies and services. As the volume of business grows, managerial and operating processes develop to execute the transactions. These processes may develop informally or be developed formally.

As the company continues to grow, computer systems and technologies with greater capabilities are added to better enable the processes or to establish new business processes and management controls. Additional employees are hired, and a management structure and organization begins to evolve, either formally or informally, with leadership, a chain of command and spans of control. Formal performance measurements may or may not be developed and implemented, but every business function in the new enterprise has a way of defining how it is performing.

At any time from the original startup, the value of the enterprise could be growing. As assets are acquired, customers are added, products are sold, customer invoices are paid, current products improve, new products are added, new market segments for products are discovered, and the company begins to generate a small profit as it funds its growth. The company’s name and products begin to build brand recognition as more products are sold and customers are added.

With the feeling of success as the company grows, owners and investors may begin to contemplate a sale of the company, or the company may be approached by a reputable suitor to discuss the potential for acquisition. In any event, the vision and focus becomes defining the value of the company.

More Value Than Assets

In its simplest form, the value of the business could be the fair market value of assets, minus the liabilities, with added intrinsic value for the customer base. If the value of the company is no more than its assets and customer list, the owners and investors will have sub-optimized their return on investment, realizing that their blood, sweat and tears created little value for resale, as core competencies, management capabilities, business and operating practices and processes did not create tangible value for the company. Consequently, the intellectual capital of the business is concentrated in the owners. This means, every day the intellectual capital of the company, including core competencies, operating practices and processes, product knowledge and understanding of the business goes out the door at the end of the day and into rush-hour traffic.

There are numerous companies being acquired regularly by experienced buyers and business operators for the assets value of the company. These companies are not sold for a premium price because the assets and customer list do not command a premium price.

The experienced buyer and business operator recognize the asset value of the company and bring to the company the intellectual capital, core competency development, operating practices and processes to significantly increase the value of the company. Or, the buyer has the capability to develop these in the company, thereby increasing the overall value for the company.

Building core competencies, developing and implementing management processes and practices, developing capabilities in management and employees, and building an operating team are not prerequisites of large companies. They are the fundamental building blocks and strengths of the company with value greater than its assets and customer list. Every company has this capability regardless of its size. A company without these capabilities is nothing more than a set of assets and a customer list. The breath and depth of a company is provided from its ability to develop good employees, develop core competencies and a management team with fundamental management processes to plan, execute, grow and control the company, even when the owners are not present.

Too many companies fail to optimize their total value by neglecting a major component of the company’s value—the core competencies, management processes and employee development. When developed properly, this component of the company’s value significantly increases the total value and worth and is reflected in its financial and operating performance with consistency in growth, profitability and return on investment. This component provides strength and stability to the company and its long-term development. Instead of a company that is managed like a circus with a ring leader directing each act, it is managed like a basketball team, where each manager contributes to the company’s team effort and execution of each play. When exceptions to the plan’s execution occur, each team member compensates and adjusts to achieve the required results.

In previous articles, I’ve written “every business is perfectly designed to achieve the results it gets.” This axiom holds true regardless of the size, industry, product offerings, services and customers of the business.

The value of every business is greater than the sum of its assets and its customer list, when: it has the management talent and capabilities to plan, execute, grow and control the business; it develops and maintains core competencies that provide competitive advantage; it implements and improves its management processes, business practices and processes; and it develops, educates, trains, coaches and mentors employees and develops a management team.

The real test of whether your company has developed this added capability and value component is when the executives, owners and managers have the confidence to take a week of vacation or travel for business and are comfortable with the business under the direction of its remaining employees until they return. If the executive, owners and managers do not have this confidence, it indicates a major void exists in the company’s greater value, and it’s time to focus on increasing the total value of the company.

Bruce E. Jacobs is a management consulting partner with more than 28 years of experience working with executives and their management teams to improve operating performance, increase shareholder value, develop and implement business strategies and operating plans to achieve systemic business improvements. He has spent more than 20 years with two international accounting and consulting firms. He can be reached at (314) 704-0693 or at [email protected].