Value-Based Management
Even if you don’t plan to exit your business anytime soon, managing it with an eye toward value – what we call “Value-Based Management” or “VBM” for short – is an important discipline. Why? Because business decisions made within the context of value-creation are invariably the right business decisions. In other words, Exit Planning is Business Planning.
Cash Flow and Risk
Your business is an investment and, like any investment, its value is largely dependent upon two variables: its ability to generate future cash flows, and the risk associated with those cash flows. Because lower-risk cash flows are more valuable than higher-risk cash flows, the value management process is as much about minimizing controllable risks as it is about maximizing future cash flows.
Value-Drivers
Value-drivers are the controllable levers that you use to manage value. There’s a full discussion of them in Focus Four™ but, to summarize, there are eight that we consider to be of primary importance:
Financial Systems – Are your financial systems timely and accurate (if you don’t have timely, high-quality financials, you can’t make timely, high-quality financial decisions)?
Financial Performance – Are past and projected growth in sales, profitability and ROIC consistent or “bumpy”?
Competitive Advantage – Are product- and activity-based differentiators (including your Brand Promise) well-defined?
Revenue Model – Do you have a revenue model that encourages repeat business?
Culture – Do you have the right people in the right seats (enthusiastically) doing the right things right?
Diversification – Is the business overly-reliant upon any single customer, vendor or employee?
Customer Satisfaction – Are formal processes in place to capture customer feedback?
Ability to Scale – Are core processes documented, and Key Performance Indicators regularly monitored? Can the business operate without your day-to-day involvement?
Again, these aren’t simply value-drivers, they’re also key business-drivers. They’re the levers you want to manage whether you’re planning to sell your business in 3 years or 30.