Five factors for creating value Featured

8:00pm EDT April 30, 2012
Five factors for creating value

Many of us have heard the saying, “If you don’t know where you’re going, you probably won’t get there.” When it comes to building value in a company, this couldn’t be more true.

“Building a successful business — one that yields the greatest value to stakeholders — is hardly a random event,” says Jeff Stark, audit partner at Sensiba San Filippo. “It is the result of careful planning by business owners who understand which factors truly create value.”

Smart Business spoke with Stark about five critical factors for successful companies to create value.

Business owners have a clear plan, which they relentlessly pursue.

In order to maximize value, successful businesses must have stakeholders who are ‘one-minded.’ Business is very much a team effort, and a clear goal will help focus everyone’s energies.

Building consensus is very much a top-down process. It is important to determine which strategic track your company is on. For example, building a company for acquisition is a very different process than building a business to hand down to the next generation. Stakeholders need to know where they are headed so they can make smarter, better-informed decisions. Maintaining consensus is not always easy. Businesses can often be crippled by ‘analysis paralysis.’ Without clear, agreed-upon goals, decisions are often second-guessed, and the company must expend time and energy to get everyone back on the same page.

Stakeholders buying into your plan will give you the confidence to succeed in selling your value to customers. Consensus creates value at all levels, from making better hires to collectively working to overcome setbacks.

The business correctly values its products and services.

A second way of increasing value is making sure products and services are sold for their true value. Value is too often defined as how much it costs a company to produce the product or provide the service. Successful companies critically evaluate how much their products and services are actually worth to their customers.

Every company must have someone who can get in front of a customer and explain why a product or service is valuable. Asking for and getting the value of the product or service as it relates to the customer is critical to the process of generating value.

Many companies have a culture that takes a lesser view toward salespeople. Successful companies foster a sales culture and help employees recognize the value of the products and services they provide.

The company is in the business of relationship management.

Relationship management encompasses all of the relationships outside of the employees or customers of the business. These include vendors, bankers, attorneys and others who are essentially on the company’s business team. These relationships add value to the business. These ‘outsiders’ can give you valuable perspectives that you wouldn’t be able to get from people more intimately connected to the business.

Companies should focus on building solid relationships and not be overly concerned with ‘chiseling down the fees.’ The company should consider fees in light of the greater value it receives from key relationships.

Developing key relationships brings value to organizations. Oftentimes, simple acts, such as paying invoices on time or providing reports to lenders as promised, can make their lives easier, ensuring that the relationship will bring value when needed most.

Things must be written down and must be easily retrievable.

Documentation of key business activities can add significant value to a company. This is important for two reasons. In acquisitions, documentation often increases the value of target companies. When key business practices are written down, the acquiring company has more certainty that the institutional knowledge is safe. On the other hand, there are countless cases where lack of documentation has led to the collapse of an acquisition.

Businesses can also create value through operational improvements. Processes are refined and improved, but without documentation, value is often lost. When things are written down, they become real. There is suddenly tangible proof that can be accessed by internal personnel, outside accountants, the IRS, or anyone else who needs it. This becomes invaluable from an operating perspective, not to mention situations of disaster recovery.

The company must have an attractive, well-defined culture.

Culture means different things to different companies, but all companies should take the creation of a responsible business culture very seriously. Building a culture often starts with setting the tone at the top. When you build a culture that is open and honest, you have a better situation than one that is closed and secretive.

While some things need to be kept secret, sharing of information is almost always beneficial for the company. Business leaders should share the firm’s goals, challenges and successes with their teams. When everyone is aware of the target and how to meet it, more team members become involved in helping to reach goals.

Creating an attractive culture can improve performance, foster creativity and lead to greater contributions toward innovation. Companies should develop a culture that can adapt and take advantage of new ways of doing business. If a culture is stagnant, there can be missed opportunities for making the business run smoother and more efficiently.

This leads to a larger point about the nature of high-value businesses: The business may belong to you, but it is dependent on other people helping you achieve your goals.

Jeff Stark is an audit partner at Sensiba San Filippo, a regional CPA firm based in the San Francisco Bay area. Stark specializes in increasing values of venture-backed technology firms. At SSF, he has helped prepare companies for acquisitions upwards of $100 million. Reach him at (408) 286-7780 or jstark@ssfllp.com.

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