Warren Buffet once said, “Price is what you pay. Value is what you get.”
If you own a business, the day will come when you will wish to sell. When it does, you will want to be paid the best price possible for your life’s work. To do so, you need to have built a business with a lot of value.
Most people don’t own businesses, but instead sell their services to employers. They too should be focused on value. In selling one’s services, employees can earn the best price (paycheck) by providing real value to their employers.
Focusing only on businesses for the moment, there are many sources of value.
We typically think of business value deriving from earnings. The more profitable a company is, the more valuable it is. Companies are sold at a multiple of EBITDA (earnings before interest, taxes, depreciation, and amortization.) A company with EBITDA of $1.5 million, will sell for $6 million, if the buyer agrees that it is worth a multiple of 4.
Earnings are the objective component. They represent a hard number determined by application of generally accepted accounting principles. That way, when comparing the earnings of companies in the same industry we can have some assurance that we are comparing apples to apples.
Multiple is more subjective. A better company demands a higher multiple of earnings. And even after that determination, when potential buyers get a close look at a company, usually through due diligence, they often seek purchase price adjustments or hold backs to reflect deficiencies they find.
What makes one company better than another, and therefore deserving of a higher multiple, with no or few purchase price adjustments?
The long answer is that multiple and price adjustments are driven by a number of factors such as a company’s competitive position in the market place, the power of its brand and reputation, strategy, and financial strength, among other things.
The short answer is that companies that execute well have more value, hence, will fetch higher prices.
So business owners with an eye to eventually selling — and every business owner should have sale in mind — need to be ever-mindful of the value of execution.
In their book Execution, Larry Bossidy and Ram Charan tell us that execution is about the integration of strategic processes, people processes, and operational processes. The book, written in 2001, has lessons still relevant today. And while written from the perspective of big companies, the messages apply to smaller businesses as well.
The strategic processes encompass a company’s business model, the plans it makes to accomplish objectives, and what it wants to be. But the greatest strategic plan in the world, or the most ingenious business model, mean little if the company does not have the means to act upon its plans.
The people process is designed to assure that the right people are in the right place to do the jobs that are required to accomplish the strategy. And it is about assuring that there is a clear assignment of responsibilities, and accountability for discharging those responsibilities.
The operations process encompasses the detailed steps that need to be taken to accomplish the plan or the strategy. These steps, and progress toward goals, need to be continually monitored, and adjustments made as necessary. The integration of these processes is critical. Effective integration takes hard work and relentless questioning and watchfulness.
It doesn’t require an MBA to be a master at execution. It requires keeping an eye on both the big picture and the details, good communication (including listening), and rigorous, persistent, and tenacious follow through.
When sale day comes, the payoff will be big for those who have mastered execution in their businesses.
To learn how Integrated Growth Advisors can help you solve your business challenges, contact David Landrum, Partner, at 860.295.1459 or 312.882.3266, or firstname.lastname@example.org.