Most small and midsized businesses (SMB’s) are run by their owners like cash machines, not value-based enterprises.
The reason for this is understandable. When most entrepreneurs start their company, their primary emphasis is usually financial survival – using operating cash flows to sustain economic viability. Reinvestments in the business are usually made only after all cash flow obligations are satisfied and desired perks are taken. Often there is little leftover to capitalize value-creating growth.
The longer this focus continues successfully, the more deeply cash flow sustainability becomes embedded in the culture, structure and systems – it becomes the company’s way of life. Most significantly, the team’s very expectations, homogenized thoughts and habitual decisions only serve to further strengthen the income-centered approach.
Good income-based enterprises are robust financially, strong in their growing, profitable markets, and they efficiently produce dependable products or services of a quality that meets their customers’ expectations. Every day, things seem good… this strategy seems to work, the business keeps going as-is, and there becomes little need to challenge this financial strategy.
The problem becomes apparent when the owner tries to sell their enterprise. No one is interested. Savvy investors are not looking for income-driven enterprises. Out in the equity marketplace, these types of business are the norm and in ample supply. These companies may earn their sellers 1 or 2 times valuation multiples, if they garner an offer at all.
Wise investors and prospective owners are looking for something more – they want to see the successfully implemented elements of structural, customer, human, and social capital – the secret-sauce that differentiates a truly value-based enterprise, and will potentially pay 3 to 10 times valuation multiples to purchase such a business.
The recipe for that secret-sauce is clearly understood by private equity firms. But it’s the culinary magic of fashioning that ingredient into a world-class gourmet meal that confounds most owners. Herzberg Smith & Co has mastered the recipe, and we have the proven experience and tools to help our clients succeed far beyond their industry norms.
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