Build your value – Stage three of value maturity
February 18, 2019
By Martha Sullivan, CPA, CVA/ABV, CM&AA, CEPA
Partner, Succession Planning Practice Leader
Martha leads HK’s succession and exit planning services division and is a regular contributor to Wisconsin’s InBusiness digital magazine.
Growing up, my father often reminded me that there were many levels of good health and growth. He taught me that my physical, emotional, intellectual, social, and spiritual health all contribute to my overall health. If one aspect is way out of balance, my overall health could be compromised. For example, when I burned the midnight oil to get good grades, I was running low on sleep, stressing myself out, and being snarky with others. My intellectual capital was the focus and my physical, emotional, social, and spiritual health suffered.
When I first heard this concept of multiple types of health, I recall being a bit bewildered. As a youngster, I had only thought of health as my physical health, which is very tangible. Either I am healthy, or I feel lousy because of a cold, a broken limb, or something that’s slowing me down. At that stage of my maturity, the intangible aspects of health were far more elusive to me. It hadn’t occurred to me how vital these intangibles would be in contributing to my growth into and through adulthood.
In prior posts, we introduced the concepts of the Five Stages of Value Maturity of a business and its first stages – Identify and Protect. Stage Three — Build — takes the foundation set in the first two stages and turns the focus to various strategic intangibles contributing to the health and growth of your business.
Indeed, your business health and growth has facets that are tangible and intangible just like your personal. You can look at a balance sheet and judge the financial health of the business, which is largely tangible. There are assets that you can count, collect, and touch, and convert to cash. You have tangible obligations you need to fulfill, represented as your liabilities. When you compare your total assets to your liabilities, you’re left with your equity in, or net worth of, the business. This is what you would have left in your pocket after you convert all your assets to cash and pay all your obligations.
The value of your company is usually not the same as company’s equity, which is also known as “book value” or “net assets,” unless you are a very capital-intensive business or facing liquidation. In fact, your net book assets may be as low as 20 percent of your total enterprise value. Why is that?
It’s because of all your intangibles — the health and growth of your company’s human, customer, social, and structural elements. These may be intuitive, but I like to think of them this way:
Human capital — Like your personal intellect and talents, human capital is how well you take care of the mind-trust of your company. It’s how you recruit your talent, nurture their development and knowledge, keep them enthused and engaged, compensate them, and retain them.
Customer capital — How solid are your relationships? Can customers count on you? And by you, I mean the “royal you,” not just you. Can folks count on being able to get in contact with the right resource at the right time to solve their issue? Is their experience with the “royal you” consistent every time? How deep is their loyalty?
Social capital — I like to think of social capital as the company’s personality, style, and, to put it in personal terms, emotional health. In business terms, it is your culture — both inside and outside. How do you set your rhythm, pace, expectations, standards for treating others, and so on? What is portrayed to others? Are you “cool” like Apple? Wicked “smart” like Microsoft?
Structural capital — Your structural capital are your processes, systems, technologies, and know-how that allow you to do what you do so well. They are sustainable and transferable. It’s someone else being able to step in, run the house, and maintain your other capital standards when you’re not there.
On a personal level, ask yourself: “Does someone else know how to make the meals, feed and put the kids to bed, and keep the house and yard up in a way that honors your standards and maintains your strong relationships with your kids, spouse, and neighbors? Is the sitter a phone-addicted teenager who ignores everything, a Broom Hilda who terrorizes everyone and rearranges the kitchen, or your doppelgänger? Is your infrastructure consistent and predictable like a McDonalds hamburger or more like Forrest Gump’s box of chocolates — “You never know what you’re going to get”?
During Stage Three — Build — you consider these strategic and intangible aspects of your company in light of:
- Your goals for the business;
- The initial plan developed in Identify; and
- Your progress made in Protect.
You score your company on each of the four levels of capital and, based on the results, update your plans to grow the company in a balanced and well-considered manner. Actions in Stage Three are strategic in nature. They require an investment of your time, money, and resources for which the payback may be over the course of years. There is decidedly more risk in the Build stage. (This is precisely why we focus on protecting the company in Stage Two.)
Operationally speaking, you and your team maintain a similar rhythm in Stage Three as you adopted in Stage Two. Your plan documents set the tone and expectations for actions. You and your team break your action plans down into chunks for implementation over the next 90 days, complete with assignments for specific, measurable outcomes. Ninety days later, the team reconvenes to review progress and reset for the next 90 days. These “90-day sprints” instill a culture of action and accountability, which drive results and progress toward goal achievement.
As you get closer to the achievement of your goals, you approach entering Stage Four — Harvest. Harvesting is a natural part of the business ownership life cycle, whether we like it or not. However, Stage Four does not shove “exit” in your face. At the same time, it doesn’t wait for one of the “Five Ds” (death, disability, divorce, disagreement, and distress) to force the sale of the business either. Curious? Read the next installment of the series, coming in a couple of weeks.