Avoid the Complacency Trap: Adopt an Investor Mentality
August 30, 2018
|
Corporate Advisory,
Business Strategy
- Keywords:
- growth
- m&a
- succession planning
August 30, 2018
|
Corporate Advisory,
Business Strategy
Your company is doing great. Earnings are steady, everyone is happy. This certainly feels good, but it’s also a potential recipe for complacency.
The truth is that by simply staying the course you could be hurting your business in the long run. For a family-owned business, that means you’re eating away at your family’s long-term wealth. One way to avoid the complacency trap is to adopt an investor mentality, which will allow you to focus on value creation.
Investors, by nature, are focused on maximizing value and achieving solid equity returns (generally exceeding the S&P 500). As a business owner, it’s natural for you to focus on the job of running the business—it’s what you know best! However, you’re also an investor making a daily choice to own the stock in your company. You may also be making this choice for your family. That’s why it’s important to think like an investor.
At some point in the past, your business was founded or acquired, and the business grew while generating returns for you (or your predecessors) that likely far exceeded returns available from owning publicly traded stocks. This involved material risk taking. Now that the business has scaled, risk taking is certainly more measured but cannot be eliminated. Business owners can and should achieve returns that make it worth continuing to own the business.
Explore your alternatives
Taking an investor-like approach to growth starts with establishing the key objectives for the shareholders. From the owners’ perspective, it could be maximizing growth or preserving the founder’s legacy. However, you must also consider the impact these objectives might have on the business. For example, if you pay large dividends, this might limit the financial capacity of the business to invest in new equipment or make acquisitions. By having conversations with key stakeholders, you ensure that the shareholders’ objectives and those of management are aligned.
If the goal is to simply preserve the status quo and pay dividends, it might be time to consider a sale of the business. It’s likely that the wealth available now from a sale, and reinvestment of the proceeds in other assets, far exceeds what might be available in the future if the company experiences low grwoth and limited internal investment.
Once you’ve aligned objectives, you’ll have a clear path to value creation consistent with those objectives. One helpful approach is to complete a strategic alternatives review. This allows you to step back and assess your options with the help of detailed analytics informed by real-time market intelligence. Your best move could be making an acquisition, investing in a new plant and equipment, forming an ESOP, buying out certain shareholders or paying a one-time dividend. The goal is to give you confidence that the course you pursue is the one that best achieves your objectives.
Focus on value creation
Every day that you continue to own your business, you’re making a decision to invest in it. Becoming debt averse is one common pitfall that many family-owned business owners fall into. The truth is that debt financing can help you grow the equity value of your business. Some business owners tend to shy away from debt for a variety of reasons. However, when used prudently, debt can be a powerful tool to drive returns.
While you’re probably right to avoid taking the very last dollar of debt available to you, there is often a reasonable level that can be comfortably supported and deployed to provide you and your family with appropriate returns. Think of it this way—if you sell your business, it’s highly likely that the buyer will use a significant amount of debt to fund the purchase. You can engineer your own private equity-like returns while achieving liquidity, diversifying your wealth and transferring wealth to future generations.
Most privately held middle-market businesses have a cost of equity exceeding 15 percent while debt typically costs less than half of that. If you were to use debt to finance an acquisition, for example, it can help accelerate your returns by using relatively inexpensive capital while shareholders retain all of the upside. Strategic acquisitions, funded with the right mix of capital, can help you create value and have the potential to deliver excellent returns for you and your family.
Keep moving forward
It’s tempting to coast along with steady performance. But in the long run, by standing still you may effectively be in decline.
The key is to remain focused on generating incremental value. There is no one-size-fits-all solution. And whatever strategy you choose for creating value—buying another company, investing in a new technology, or building a new facility—it’s essential that you do it based on a thoughtful consideration of your objectives.
Read more
Your company is doing great. Earnings are steady, everyone is happy. This certainly feels good, but it’s also a potential recipe for complacency.
The truth is that by simply staying the course you could be hurting your business in the long run. For a family-owned business, that means you’re eating away at your family’s long-term wealth. One way to avoid the complacency trap is to adopt an investor mentality, which will allow you to focus on value creation.
Investors, by nature, are focused on maximizing value and achieving solid equity returns (generally exceeding the S&P 500). As a business owner, it’s natural for you to focus on the job of running the business—it’s what you know best! However, you’re also an investor making a daily choice to own the stock in your company. You may also be making this choice for your family. That’s why it’s important to think like an investor.
At some point in the past, your business was founded or acquired, and the business grew while generating returns for you (or your predecessors) that likely far exceeded returns available from owning publicly traded stocks. This involved material risk taking. Now that the business has scaled, risk taking is certainly more measured but cannot be eliminated. Business owners can and should achieve returns that make it worth continuing to own the business.
Explore your alternatives
Taking an investor-like approach to growth starts with establishing the key objectives for the shareholders. From the owners’ perspective, it could be maximizing growth or preserving the founder’s legacy. However, you must also consider the impact these objectives might have on the business. For example, if you pay large dividends, this might limit the financial capacity of the business to invest in new equipment or make acquisitions. By having conversations with key stakeholders, you ensure that the shareholders’ objectives and those of management are aligned.
If the goal is to simply preserve the status quo and pay dividends, it might be time to consider a sale of the business. It’s likely that the wealth available now from a sale, and reinvestment of the proceeds in other assets, far exceeds what might be available in the future if the company experiences low grwoth and limited internal investment.
Once you’ve aligned objectives, you’ll have a clear path to value creation consistent with those objectives. One helpful approach is to complete a strategic alternatives review. This allows you to step back and assess your options with the help of detailed analytics informed by real-time market intelligence. Your best move could be making an acquisition, investing in a new plant and equipment, forming an ESOP, buying out certain shareholders or paying a one-time dividend. The goal is to give you confidence that the course you pursue is the one that best achieves your objectives.
Focus on value creation
Every day that you continue to own your business, you’re making a decision to invest in it. Becoming debt averse is one common pitfall that many family-owned business owners fall into. The truth is that debt financing can help you grow the equity value of your business. Some business owners tend to shy away from debt for a variety of reasons. However, when used prudently, debt can be a powerful tool to drive returns.
While you’re probably right to avoid taking the very last dollar of debt available to you, there is often a reasonable level that can be comfortably supported and deployed to provide you and your family with appropriate returns. Think of it this way—if you sell your business, it’s highly likely that the buyer will use a significant amount of debt to fund the purchase. You can engineer your own private equity-like returns while achieving liquidity, diversifying your wealth and transferring wealth to future generations.
Most privately held middle-market businesses have a cost of equity exceeding 15 percent while debt typically costs less than half of that. If you were to use debt to finance an acquisition, for example, it can help accelerate your returns by using relatively inexpensive capital while shareholders retain all of the upside. Strategic acquisitions, funded with the right mix of capital, can help you create value and have the potential to deliver excellent returns for you and your family.
Keep moving forward
It’s tempting to coast along with steady performance. But in the long run, by standing still you may effectively be in decline.
The key is to remain focused on generating incremental value. There is no one-size-fits-all solution. And whatever strategy you choose for creating value—buying another company, investing in a new technology, or building a new facility—it’s essential that you do it based on a thoughtful consideration of your objectives.
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