Author: Chuck Fenske
If you have ever watched CNBC and a CEO of a public traded company is being interviewed, at some point the phrase “delivering shareholder value” will likely come up multiple times. The accountability of the CEO to increase the value of stock and ultimately the value of the company dates back to a 1919 court case. In Ford v. Dodge, the Michigan Supreme Court stated that the role of the CEO is to work on the behalf of shareholders to increase the value of the company. Most businesses are not publicly traded and do not have thousands of shareholders. What is the role of the CEO if they are also the sole shareholder?
The answer to the previously raised question is increase the value of the company just like their publicly traded counterparts. Owners/Operators of small to medium size companies have the additional challenge of not having the same level of support staff as larger, publicly traded companies. The owner of a small company may be head of human resources, the chief financial officer and CEO. By being mindful of the demands placed on owner’s time, and shifting their focus to long-term value creation, their tremendous upside potential. Value is an impactful metric for assessing performance because it accounts for the long-term interest of all stakeholders in a company. There is compelling research that maximizing value of a company in the long-term increases employment opportunities, raises customer and employee satisfaction, and results in the company being more civically engaged.
If increasing the value of a company is the mandate of all CEOs (public or private), then what is the first step in accomplishing this? CEOs need to know the value of the company. CEOs of publicly traded companies have the benefit of knowing the value of their company in real time. They can quickly reference their share price and benchmark it over time against competitors in the industry. Owners of private companies do not have convenience of the market valuating a company in real time every day. The best a private owner can do is have a periodic valuation done. Most owners only engage a valuation professional when there is death, divorce, or they are interested in selling their business. A periodic valuation can be a powerful tool to help grow a company, and a helpful step to begin to view the company as an investment. Over time, it will be clear what the drives of the business are and how to increase the value. Some important numbers to consider when informally looking at the state of a business are revenue, cash flow from operation, earnings before interest, taxes, and amortization (EBITA), and gross margin profit margins. It is important these numbers are trending upward and there is little variation from year to year. Also important, is how these number compare to peers in the industry. This not a replacement for an actual valuation, but a good informal gauge. With periodic valuations and these informal metrics, a business owner is well on their way to looking at their companies more like their publicly traded counterparts.
Chuck Fenske is Vice President of Consulting for Pease & Associates and member of Central Ohio ABC
1422 Euclid Avenue, Suite 400
Cleveland, Ohio 44115