Business Core Values - Increasing Valuation

By Jarrod Musick, Client Wealth Strategist, CFP®

Understanding who your business is at a core level makes it more valuable. How do you look at the world? What do your people expect of each other? To which projects do you say, “Yes”? Core values are a focus, and focused businesses outperform the unfocused.

Two Perspectives

Think about this topic from both a valuation perspective and that of an acquirer, with a heating, ventilation and air conditioning (HVAC) company as an example. Ask yourself which is more valuable, the one that does both residential and commercial or the one that does pre-1950 commercial buildings only? The latter is going to be much more efficient with inventory, training and marketing spend.

What about a business with a core value of preserving the past so that buildings are given new life and not torn down? That value could be manifested as an HVAC company that only works on older buildings. Think about the recruiting advantage. At that company, you get to be part of preserving history in your community. The HVAC technicians in your area all do similar work, but they are preserving history at this company. Where would you rather work?

Values and Communication

We all have opportunities to increase company focus and be more specific on who we are and what matters most. We also have the incentive because we are financially rewarded for doing so. Every industry is incredibly nuanced. Without focus, we end up being more generalized and more commoditized than we need to be. Your values allow you to focus and differentiate in any area you want. Is it a core value for everyone to have a voice? That likely dictates how you do in-team feedback and how you communicate with your clients.

Better communication typically creates better results. What about personal agency, a core value shared across my companies? Focusing on making sure that everyone on your team has agency in decision-making in their lives promotes a more engaged and self-motivated team. Those people outperform a highly bureaucratic team.

Conflicts and Growth

What if your personal financial interests conflict with the growth of your business or your team? Most of us aspire to be the very best business leaders and business owners. I have yet to meet someone who openly aims for mediocrity. As scholar, mathematical statistician and former option trader and risk analyst Nassim Taleb would say, those entrepreneurs we most look up to have “soul in the game,” which is a level above “skin in the game”, financially.

We believe that what we do matters. It matters to the people who depend on the things our businesses do and the products and services that we build. It matters to the people who rely on the income we generate, such as our families. It also matters greatly to the people we employ, for they are the people who give us their very best and drive our businesses forward. When we are at our best, our team members have the opportunity to grow inside the company by taking on new projects and new areas of responsibility.

As our businesses grow, a beautiful cycle is created when good people produce excellent results. We then need to add more people to keep up with the growth, and then our great people get to move up and teach this batch of new people how to be their best. What happens when growth slows or stalls out? What happens when growth is still good but just does not meet expectations? What happens when we invest in the business based on producing future growth and do not get it? We end up with our personal financial goals at odds with those of the business.

The business then needs more resources to keep chasing growth. Those resources usually come out of the pocket of we owners, who can end up feeling trapped and knowing that we need to make a drastic change but are unable to come to terms with abandoning a goal we cannot reach. Entrepreneurs are wired to believe that we can conquer almost anything and that persistence and hard work will win out in the long run. This mindset can make it especially difficult to know when you should abandon your business's main effort.

Getting Unstuck

So how do you get unstuck when you get into this position? Go back to your personal principles and the principles of your business. What are you trying to accomplish in the world, and how do you want to spend your time? Next, revisit your “enough number”. How much do you need and when do you need it? Can you endure smaller or no personal financial outcomes for a while in order to change tactics but also stay on your growth strategy? Is your business's equity value already at your “enough number”, and could you elect to sell? The key is in the intersection of all of these ideas. What do you want to do both now and in the future, and what do the numbers look like?

If you are doing what you want to do, but the personal outcomes are not working, see where you can add incrementally. Can you change a few tactics and get through this period? Doing work that aligns with who you are and how you want to interact with the world is precious. If you can weather the financial storm, do it. If you are not doing what you want to do, what are we even talking about? Make a new plan and move on. This stalled growth may be the perfect push to get you to sell or merge and move onto the next thing, the thing that matters to you.

But do not freeze. Do not get stuck. We know when a business isn’t working or will not be working in the very near future. Think about what you need to feel fulfilled and which financial resources allow you to do that, and move forward from there. Many others depend on us and our business, but we can't serve them if we aren’t in the right place ourselves.

Important note and disclosure: This article is intended to be informational in nature; it should not be used as the basis for investment decisions. You should seek the advice of an investment professional who understands your particular situation before making any decisions. Investments are subject to risks, including loss of principal. Past returns are not indicative of future results.