Keeler Owner’s Korner: March 2023

Shareholder Value Should Be Every Private Company’s Core Strategy

1.) The Bottom Line. As the Exit Planning Institute (“EPI”) so effectively teaches through its business owner and advisor educational offerings and proven processes, business value should take priority over income and become a core strategy for aligning business growth and an eventual ownership transition with owner goals and objectives.1 “Shareholder value” is about more than current owner compensation and dividends. It is in essence what a buyer would pay for a company’s equity value today and is, therefore, what the owner would receive for that equity.2 It’s a snapshot today as well as a moving target for tomorrow. More important, it can be exponentially improved by addressing not only profits but the business risks, competitive differentiators and intangible “assets” that drive a buyer’s valuation and price. The author thanks EPI for its commitment to providing business owners and their advisors with a common language and proven methodologies for pursuing and accomplishing better outcomes for private companies and their owners.3

As most established businesses are valued based upon EBITDA times some earnings “multiple”, increasing that multiple is a critical part of the path to shareholder value. That multiple is ultimately about a company’s risk and return profile – factors that don’t show up on financial statements. As EPI teaches, most of those factors relate to “goodwill”-creating “intangibles” such as company talent (the right people in the right jobs and their replacements), customers (competitiveness, contracts, concentration), internal systems, processes and records (accounting, intellectual property and facilities), and, yes, culture (team environment and external brand). Beyond their deep dive into a company’s EBITDA, private company investors and buyers always focus on these in valuing companies.

2.) The Owner’s Korner. Business owners are doers and they are busy. So it’s no surprise that they focus on their “manager” (executive officer or board member) and “personal” (life and family) hats day-to-day, often leaving their “owner” (shareholder) hat to procrastination and the future. Unfortunately, a lot of the M&A and private equity media is buyer or investor-focused. But buyers and investors usually pay more for companies whose owner has built shareholder value which is separate from and transferable by the owner. Business owners and their advisors need to be in the owner’s corner. Strategic and private equity buyers have a lot of people in theirs.

By recognizing and managing company ownership today for what it is, a private equity investment that usually constitutes most of the owner’s net worth, the owner and the business can be better positioned for uncertainty and external economic and market forces. Shareholder value not only reflects the business’ worth to the owner, it is the beauty in the eyes of buyers. Regardless of the owner’s clock or calendar for exiting the business, keeping an eye on current shareholder value and prioritizing actions to continuously increase shareholder value will simply give the owner more options and freedom and mitigate risk and stress.

3.) The Owner’s People. Driving shareholder value is not selfish. Business owners take care of a lot of people. When shareholder value is enhanced, all of the company’s stakeholders – employees, partners, customers, suppliers and the company’s community – benefit. What’s good for the owner and their family is good for all stakeholders, because increasing the company’s valuation today will strengthen the business and make it more transferable tomorrow. Current shareholder value enhancement “de-risks” the business and increases income while, because it increases the owner’s transfer options, making the “how” and “when” of a future exit less critical.

A business should always be operated as if it were for sale. This requires not only managing the bottom line and protecting and growing shareholder value, but also ensuring that the business and the owner are prepared for an ownership transfer. There is no crystal ball, and an ownership transfer can result from unexpected events or a planned transaction or series of steps. Prospective buyers actually look for prepared businesses and owners. And the owner, their family, and employees, customers and suppliers are all more comfortable when everyone is prepared. This preparedness is not just about contingency planning, it enhances shareholder value today.

4. The Owner’s Vision and Leadership. Business owners are builders and effective managers. They call the shots. Public companies talk about shareholder value, but a shareholder value business strategy is particularly powerful for private companies because, as EPI teaches, it both increases transferable company value and aligns that value with owner goals. Put simply, the owner is a private equity investor who will eventually seek independence from the company and look for liquidity for retirement, as well as their family and other stakeholders. Shareholder value takes care of the owner, and at the same time, takes care of the business and all of its stakeholders by making the business more attractive to future owners, whether an outside buyer, internal management buyers, or family successors.

Once the owner adopts and commits to a shareholder value business strategy, then it’s time to get buy-in from a team and to turn uncertain and often delayed planning into a process for monthly, quarterly and annual actions that will benefit all of the company’s stakeholders today and over time. This commitment and team buy-in will require time, meetings and money. Shareholder value should provide a good return.

5. The Owner’s Team and Take-Aways. In addition to increasing company value in the near term and giving the owner new peace of mind that company actions and strategy will better position the owner and the business for both the planned and unexpected, a process for driving shareholder value presents a great opportunity to assess and improve the internal management and outside advisory team. The owner has to lead and communicate the vision. But the team needs to support the owner and execute on the process in order to produce measurable results. The following is a high-level summary of the blocking and tackling required to act on a shareholder value enhanced strategy. EPI’s methodologies are much more detailed and helpful in terms of coordinating the process and ensuring communication, accountability and results.

The owner can start an action-oriented process by meeting with the most trusted advisor or perhaps a new advisor. This meeting should focus on good questions rather than the right answers. And it should result in a clearer owner vision of the company’s and the owner’s goals, including their strengths, weaknesses, opportunities and threats or “SWOT” analysis. Owner and advisor honesty and even advisor “tough love” will produce the clearest, tested vision and realistic goals.

After this vision and goals-testing and “SWOT” assessment discussion, select team members should be brought into give their input on and secure their buy-in to the vision and goals, as well as a process of prioritizing shareholder value enhancement actions and developing a process “dashboard” for accomplishing and measuring those actions. The easier and less expensive risk-reducing actions might take priority to achieve momentum. The process and dashboard should be dynamic, continuous and flexible enough to be changed. The dashboard should guide and help monitor monthly, quarterly and annual tasks and results toward longer-term shareholder value enhancement goals.

The company’s C-suite may require some changes or additions. Same goes for the outside advisors, the core of whom usually include the CPA, the owner’s financial or wealth management advisor, and an attorney. But other advisors should be brought in depending on the company’s and the owner’s needs and the selected strategy and process.

While the shareholder value enhancement process will require time, money and meetings (part of the owner’s commitment), it should feel easier and more fulfilling to the owner in that it will be integrated into to the company’s day-to-day operations, management meetings and culture. The process can thereby free the owner from the uncertainty and complexity of “separate” estate, financial and business plans by addressing them all through owner and business actions that target one goal and path – increasing shareholder value.

Every company and owner is unique. So their team and process should be different. But the team should be comprised of experienced members who play well with others in the sandbox. Owner vision and leadership, supported by the right team, will make shareholder value – and company and owner success – a daily, quarterly and annual strategy and action-oriented process. That strategy and process should start today so that the owner’s life (during and after their business career), liberty (from the business and aspects of management that should be delegated to others), and pursuit of liquidity (ultimately realizing the value of company ownership and enjoying and sharing it) are improved and realized.

“Exit” planning will not be successful and shareholder value will not be achieved if they are put off until a sale. Even if a sale is expected in the near future, a process of addressing business risks and increasing the EBITDA multiple will increase shareholder value and the purchase price. There is no better time than the first half of 2023 to adopt a shareholder value mindset, strategy and process supported by owner vision and leadership, team accountability, and a continuous process and culture of action. Company owners should put their owner hat back on and, to borrow a now-popular phrase, start working “on” and not just “in” their business.

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1 Exit Planning Institute, www.exit-planning-institute.org. See also Christopher Snyder, Walking to Destiny: 11 Actions an Owner Must Take to Rapidly Grow Value and Unlock Wealth, https://exit-planning-institute.org/resources/walking-destiny-downloads/.

2 https://corporatefinanceinstitue.com/resources/management/.shareholder-value/.

3 While many of the concepts in this post are based on EPI’s proprietary educational offerings and methodologies, EPI is not responsible for the author’s terminology around or interpretation or presentation of those concepts in this post. That said, the author hopes that this post is a credit to EPI and its tremendous contribution to exit planning.