At the core of a CEO’s role is increasing shareholder value, which is easier said than done. At Aamu Partners, we have worked with hundreds of CEOs and identified five common pitfalls that CEOs encounter in trying to increase the value of SMEs. This article presents these pitfalls and ways to avoid them.
The 5 Pitfalls of CEO in Company Value Management
1) No clear plan for value management
2) Operational activities are not focused on increasing value
3) Failure in strategy implementation
4) Too high dependency on individuals
5) Lack of understanding in value determination methods and failure to communicate value
1. No Clear Plan for Value Management
A company may have internationalization plans, documented internal processes, and usually some kind of business strategy, but often forgets where it all starts: the owner strategy. The owner strategy is a plan of the company’s owners on how they want to benefit from their company.
It’s important to consider many practical issues in the owner strategy, such as responsibility questions, roles of the owners, and investments. But above all, it should consider the financial reward for the owners: do they want the company to be a stable dividend machine, or is the business or operation intended to be sold at some point? And under what conditions would they be ready to give up the company?
The owner strategy should be made with an external and independent party to ensure it doesn’t get buried under daily tasks and is completed efficiently. An external party also ensures that all owners genuinely have their voices heard. When it’s clear for the owners what they want to achieve with the company, it’s necessary to ensure that the business strategy aligns with the owner strategy. This leads us to point two.
2. Operational Activities Not Focused on Increasing Value
Only when it’s known what value the owners want from the company can operational activities be directed to increase this value. If the goal is to build a dividend machine, the best solution might be to develop a company that steadily increases its equity. However, if the plan is to sell the company someday, it’s crucial to know what the other party is willing to pay for.
In business arrangements, a company’s value is realized only when the other party is ready to pay a certain price for the company or its operations. Thus, the business must be packaged into a whole that is appealing to the buyer. This might mean focusing the business on certain products or monthly billing, for example. In some companies, the team’s expertise and the company’s goodwill may have greater importance, while in others, resources and inventory play a bigger role. Mainly, the other party is often buying future earning potential, which means revenue and profitability. Therefore, it’s essential to cut off any unnecessary parts, like real estate, from the company being sold.
Understanding what makes the specific company valuable is crucial, and it’s important to start managing and measuring those aspects for which the other party is willing to pay.
The business strategy should be built to serve the owner strategy, whether the goal is a dividend machine or business arrangements. Unfortunately, strategy implementation often fails.
3. Failure in Strategy Implementation
Almost every company has a business strategy, or at least a sketch of what the company should look like in 5-10 years. However, implementing this vision is not simple. Research shows that only 14% of business leaders are satisfied with the execution of their strategic plans, even though 66% of them say they actively work on their strategy. The challenge often lies in translating strategic goals into practice. If the strategy aims for profitable growth over the next five years, this goal doesn’t help the CEO much on a Monday morning when deciding the focus and resource allocation for the upcoming week. “What to do, and what not to do.”
If we compare this to personal life, a goal like “I want to be in better shape” doesn’t tell much about how to improve fitness. A goal like “I want to run a marathon” tells more, and “I want to run the Helsinki Marathon next May in 3h 52min” gives much more guidance on how to pursue the goal. This means registering for the marathon, participating in running coaching, buying the right shoes, but not, for example, practicing high jump or buying dumbbells.
Strategic goals need to be implemented by refining them to a level where it can be said, “these actions are what we do in our company, and these we don’t do.” The goal is not “profitable growth” but rather “by next May, we have a collaboration agreement with 15 Finnish service business clients with a billing of 4000€/month, where we have a 22% sales margin”. The failure in strategy implementation can occur for many reasons, but often the setting, tracking, and responding to goals are at the core of the challenges.
4. Too High Dependency on Individuals
Increasing company value is at the core of a CEO’s role, which often leads to the fourth pitfall: the company’s value depends too much on individual people, like the CEO. The CEO might be the company’s top salesperson, deeply involved in customer work, or possess irreplaceable expertise. In such cases, a financier or the counterpart in business arrangements pays for the person, not the company or its operations.
If the CEO wants to move to other tasks or retire someday, they must ensure that the company’s operational activities run efficiently without them. This is only possible by creating company structures and processes independently of individuals, and ensuring that operations proceed with the right systems, reports, and practices.
5. Lack of Knowledge in Value Determination Methods and Failure to Communicate Value
A CEO’s task is to lead the increase in value, which naturally means that they should have a broad understanding of the factors affecting the valuation of SMEs. It’s necessary to know what calculation formulas are used, how resources are valued, and much more. Only with a broad understanding is it possible to identify which value factors are important for the specific company. At the end of this article, there is a link to an e-book written by Aamu Partners that thoroughly covers this topic.
Even if there is sufficient understanding of value determination methods, communicating this value often proves challenging. As stated in point 2: the company’s value can only be realized when the other party agrees on the company’s value. Convincing the other party fundamentally involves a clearly documented value determination process and an expanded financial due diligence audit.
In an expanded financial due diligence audit, not only the company’s historical data and accounting vouchers are reviewed, but the business model is also qualitatively assessed, and financial and cash flow forecasts, along with their underlying logic, are examined. An external and independent party conducting the DD audit provides the other party with a reliable picture of the company’s future earning potential. Such a service package is also available for purchase from Aamu Partners.
The above-described five pitfalls are the most common challenges for a CEO in managing the value of an SME. Often, the challenges in value management start from the fact that the owners have not made a clear plan for the company’s future from their personal perspective. Subsequently, challenges often appear in that the goals of operational activities are not aligned with value increase, and the activities are not led based on the right numbers. The CEO can also become a challenge in value increase by being too deeply involved in the operations. The actual challenges in business arrangements or financing negotiations are often related to communicating the value and deficiencies in the company’s internal documentation.
Aamu Partners is a company focused on increasing the value of SMEs. The company is backed by entrepreneurs, investors, and board professionals who founded Aamu based on their own needs. With the effective Clarity method, we have increased the owner value of hundreds of SMEs together with hundreds of CEOs.
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