Summer fades and autumn kicks in. It happens to be my favourite season, says David Molian. Perhaps it’s a legacy of the academic year, but I’ve always found September a good time for gathering together my reflections on the year to date in preparation for new initiatives.
Since the spring of the year, this column has been focussed on the theme of building value in the owner-managed business, and the lessons that apply to entrepreneurial firms across all business sectors. In the spirit, then, of reflection and new directions, this month’s column is a reprise and distillation of the main topics covered in the previous six months.
One: Closing the gap – between the enterprise value business founders aspire to and the price a purchaser is willing to pay. In most cases that gap exists because the business is overly dependent on the owner, and can only be closed through a conscious change of behaviour. The boss has to stop performing routine tasks, desist from solving routine problems and empower the senior team to run today’s business, while giving more care and attention to building the business for tomorrow.
Two: Different business models create widely differing value. A business deriving most of its sales from long-term, repeat, predictable revenues is worth inherently more than a firm dependent on short-term project work, on the constant hunt for new business leads. This divergence is captured in the phrase “quality of earnings”. Businesses are most commonly valued through the price-earnings calculation, that is to say their profitability multiplied by a number that reflects the perceived quality of those earnings. The more the firm conforms to the first model described, the higher that number is likely to be, as a prospective buyer has greater confidence in the business’s sustainability and capacity to generate cash: the “quality”. No business model is set in stone, but if you want to change yours it requires a conscious decision and continuing commitment.
Three: Your People will deliver the Plan – but first you have to attract people who are motivated to achieve your ambitions. Then you have to retain them. It’s most unlikely they will be people whose goal in life is to make you rich, though that is the desired outcome from your point of view. They will want a career, not merely a job, and to understand your vision for the business if they are to engage with it. They will almost certainly want discretion to do their job to the full and the opportunity to grow and develop. Most business founders have no particular skill in recruitment and mistakes can prove costly. A seasoned professional can tell you how to set out your stall and set up a rigorous interviewing process to separate the wheat from the chaff. And frequent, small rewards tend to have more impact as a retention and motivational tool than relying just on the annual bonus.
Four: sticking to the knitting. Finally, all the research we undertook at Cranfield confirmed that most ambitious businesses, most of the time, grow by finding a niche in their market and consolidating their position in that niche. In simple terms, they succeed by selling more of what they’re good at to their existing customers and to others like them. It can be hard to resist the temptation of a grass that always looks greener on the other side, but you diversify too early at your peril. If you do, you run the twin risks of failing to make a success of your new activity, while neglecting the core business. Be patient. It can take a good seven years before a business finally settles into its niche in the market and gains traction.
In October’s column, we’ll look at the issue of choosing the right advisors to take you to that next stage.
David Molian is a Visiting Fellow at Cranfield School of Management and former Director of Cranfield’s renowned Business Growth Programme