Seven Ways to Build Business Value
Updated: May 3
We still don't know what's going to happen - as I wrote the first draft of this blog, oil futures were at -$37.83 per barrel. There are types of businesses that will never resurrect in the form they took before the crisis. But life sciences services, supplies, and development companies look to be in good shape in the future, and their prospects don't seem to be related to whether they pivot into the Covid-19 space or not.
In this sector we may be relatively lucky, but we still want to think about the future. Within 3 years we will very likely see a vaccine for Covid-19; possibly have viable treatments for cytokine storm; implement streamlined regulations for bringing new treatment options or PPE or life support equipment or diagnostics to market; change manufacturing and supply chains to be capable of scaling more rapidly. It's possible we'll see better vaccine preparedness with the recognition that pandemics are real threats. And, of course, other ways we live will change.
Companies that survive want to come out stronger on the other side. Stronger means at a higher value. Valuation is inherently a measure of the future, usually defined as an expectation of a business' ability to increase cash flows over time. While we're reacting to the present and trying to plan for future stability, we're not always thinking in terms of value - but this is a great lens through which to view our decisions now.
Here's a list of things that will increase value, both from a cash flow perspective and from the perspective of a hypothetical future buyer:
1. Achieve or exceed industry benchmarks. Revenue/employee, fixed asset turnover, commonly used balance sheet ratios - these are good places to start trying to understand how you could scale cash flows.
2. Once you're at benchmark, recognize that scaling (more machines, more people, etc) will increase cash flow automatically. Unless of course your sales and marketing efforts are not producing.
3. Develop a workable sales process, team, management, record system, targets, etc. Make sure marketing efforts support it and produce as planned. Train everyone to work it.
4. Spend more time optimizing leverage - refinance debt, negotiate better leasing terms for equipment, explore state and federally backed options.
5. Optimize insurance (including crisis contingency options) policies, accounting, and legal support. Choose quality providers within budget, but make sure your coverage is appropriate for your business as it grows.
6. Company culture always gets short shrift in a busy time. Make sure everyone understands your positioning, your values. Recruit on values and above-the-line attitude, and strive to get the entire company speaking with one voice.
7. Systematize your business with goals, objectives, strategies, plans, and written actions. Make sure that it can run without you. This is a critical action - a business wholly depending on its founder cannot grow beyond the capacity of its leader.
We think of value in relation to potential investors and buyers. But it's much more - adding value to your business, or the business unit you lead, results in growth beyond what's possible by leveraging only your own efforts. Even if you don't seek a buyer now, think how much better your life (and your family's) will be if it's not all on your shoulders.