The Importance of Planning for Value… At Any Stage of Your Business

A business is an asset that requires constant monitoring. Planning for value should be a dynamic aspect of daily business, regardless of whether or not there are plans to sell the business in the near future. Paul Flanagan, a managing director with P&M Corporate Finance, recently shared his insights on how to effectively maximize shareholder value and why planning for that value is an integral part of any business.

How is planning for value different from planning for the success of a business?

It’s really not. The aspects of a well-run business are the same disciplines that go into planning for value. Things like differentiating the company in the marketplace, mitigating risk, improving management depth and skill sets, developing a robust operating infrastructure—these are the things that best-in-class companies do anyway to propel their businesses forward. Simply put, planning for value is absolutely consistent with optimizing the running of your business.

But what if business owners have no immediate plans to sell? Is it as important for them to be diligent about planning for value?

Absolutely. I think a big benefit of implementing this mindset is that it positions business owners to take advantage of unexpected opportunities. For example, if they’re approached out of the blue by a buyer or if they see a sudden shift in their market, they’ll be able to go to market from a position of strength more quickly. It’s sort of like the old boy scout mantra: “always be prepared.”

The other benefit for planning for value is that almost every owner I’ve ever met has a particular conception of what their business is worth or how much they want it to be worth in order to retire or step aside. Planning for value provides them with a point-in-time assessment of value they can use as a benchmark against their perception, with the added benefit of devising a plan to bridge any shortfall or to maintain any favorable gap that exists.

For owners who are preparing to sell their businesses, how long should they give themselves to adopt the best practices to allow them to go to market from a position of strength?

Between 18 and 24 months.

Why so long?

For a company that’s considering a sale, it’s hard to realize a significant impact on value by implementing these changes overnight. For example, putting a management structure in place that doesn’t require the owner to continue to fill a lot or roles can’t be accomplished quickly. It’s a matter of assessing the necessary skill sets, locating people, bringing them on board, and helping them effectively acclimate to the organization. A seamless transition cannot be accomplished in a 30-, 60-, or even 90-day period.

Do most clients who come to you have that 18-to-24-month window available to them?

Almost never. And it can affect the end result. Do we still have terrific outcomes for our clients? Absolutely. Oftentimes, organizations that come to us are already doing the things they should be—thinking strategically, thinking long term, these things are part of their genetic code. But we’ve also seen situations where, for example, the owner is still wearing all of the key organizational hats, and it often becomes necessary that the owner agree to an extended transition plan, as there’s simply no second line of management capable of stepping up. We’ve seen examples where the same is true of the robustness of operating systems or market differentiation. Any of those factors can affect the value a potential buyer puts on a business.

So, aside from developing a management team that’s not overly reliant on the current owner, what other steps can companies take to maximize shareholder value?

There are a number of things. Developing a sustainable differentiated advantage in the marketplace, whether through technology, processes, or other capabilities. Possessing a robust risk management system, which would include appropriate insurance coverage and the development and enforcement of HR and environmental policies. Having strong operating systems that generate useful metrics to track financial or productivity data. And developing an effective planning process that includes setting and measuring performance against budgets and the longer-term strategic plan or vision. It’s crucial that these are in place to drive value in the organization.

For more information on planning for value, please contact Paul Flanagan at 248.223.3550.