Your Operations Are the Sixth Step to a Higher Valuation
Updated: Oct 7, 2020
This function is responsible for managing the resources needed to create the company’s products and services. The operations strategy does more than ensure these resouces work together. It must align with marketing and finance strategies. In addition, it has to support the business strategy, which is the company’s long-range plan.
This is the seventh in a series of nine articles that follow a business owner, John. He is taking action to increase the value of his company before transitioning or selling it and moving into retirement. In the first article, he learned that Tom—who owns a similar business—had sold it for a much higher price than John was told his company was worth. In the subsequent articles, John discovered the importance of having a business plan, what it should include, and how strong leadership and people drive the value of a business.
Business Value Enhancement 101
Value drivers affect either the earnings or the worth of an operation. Being in business is about making a profit and creating sustainable value.
Value isn’t always about the numbers. Environmental and qualitative value drivers have a dramatic effect on a company and its ability to grow. Knowing what creates—and destroys—value helps owners and managers make better day-to-day decisions. That also allows them to build increasing a company’s value into its culture.
The place to begin is a detailed discussion about the quality of the organization. This should include the owner, management team and advisor. At Birkdale, we use the results in our Deep Discovery and an Enterprise Value Assessment and the Value Enhancement Process. An initial conversation broadly examines the eight main value drivers:
In working with his business advisor to take an in-depth look at each area, John moved to the sixth category: operations.
What Is an Operations Strategy?
This function is responsible for managing the resources needed to create the company’s products and services. Here are a few of the key areas it includes: 1) the location, size and type of facilities required and available; 2) worker skills and talent; 3) technology, special processes and equipment; and 4) quality control.
The operations strategy does more than ensure these resources work together. It must also align with the marketing and finance strategies. In addition, it has to support the business strategy, which is the company’s long-range plan.
John and his advisor completed an assessment of his entire business, including its operations. This revealed he had no written operations plan. So it wasn’t surprising that some aspects of the operations weren’t being used properly.
This article explores three best practices. As with any initiative for improvement, much analysis and planning must take place before implementation.
The Value of a Chief Operating Officer
John’s company—typical of many small businesses—didn’t have a COO. As an owner, he had been involved in running all aspects of the company, including operations.
He learned that COOs are responsible for day-to-day operations and continual improvement of the firm’s efficiency. They must know what’s going on in every area, including marketing and sales, manufacturing and finance. COOs report directly to the CEO and oversee various department heads and mid-level executives. A strong COO reduces the company’s risk, which increases its value.
In a properly designed and executed role, a COO adds tremendous value to a leadership team in two ways:
As a visible leader and follower of the CEO
As a critical part of the company’s operational success and overall performance
This role is not ubiquitous—unlike other C-level positions—either across companies or over time at one company. In part, this is because it’s often hard for boards and CEOs to understand when and how to use the position. This includes sorting out how it may affect governance in the organization. It also takes tremendous discipline on the CEO’s part to make this position work.
John recognized that if he wished to make a successful transition out of the company, he needed to give up some operating responsibilities now. It was time to create a COO position and fill it with a good leader.
A Quality Product/Service Can Increase Profitability and Value
Many companies embark on quality initiatives without any idea of the likely bottom-line impact. As a result, they have no way to determine which actions are most important, or to predict if their efforts will actually bring a benefit.
Like many other owners, John had been disappointed by a lack of quantifiable results from quality efforts. The financial benefits of quality—which have been assumed by many companies—are now are being seriously questioned by cost-cutting executives. In a results-oriented environment, managers must justify the financial benefit of their quality improvement efforts.
Quality improvement in services implies spending money on quality to improve revenues rather than reduce costs. How to make profitable decisions about quality expenditures is a key managerial problem. This involves justifying the cost of all quality improvement efforts, knowing where to spend and not to spend, and knowing when to reduce spending.
The benefits of quality improvements come in two forms:
The company is better able to attract new customers, due to word of mouth and its ability to advertise the quality of its offerings. This is similar to product repositioning and is part of “offensive marketing”— actions taken to attract new customers.
Current customers are more satisfied with the products, so they become repeat buyers. Small increases in retention rates can dramatically affect profits for several reasons: 1) existing customers tend to purchase more than new ones, 2) they are more efficient to deal with, and 3) the selling costs are much lower when compared with those for winning new customers.
The notion that quality is an investment is a conscious attempt to place this kind of spending on an equal basis with other investment decisions. This can be hard, because there often is no solid basis for measuring the financial impact of quality expenditures. And it’s also possible to spend too much on quality, because not all quality expenditures are created equal.
The alternative is to make these investments because they are consistent with the quality culture at a company, or because eventual returns are taken on faith.
John and his advisor agreed they needed to take a harder look at his current quality improvement programs and any future spending in this area.
What Are the Benefits of ISO Certification?
ISO Certified means that a company has proven it follows the standards developed by the International Organization of Standardization. These include product quality, safety, reliability, environmental friendliness, and economics.
John’s operations weren’t ISO Certified. He could see significant value by taking this step:
Attracting new customers that only do business with ISO Certified vendors
Increasing sales from existing customers, new customers and markets
Improving value by strengthening product quality
Identifying better processes and using metrics to manage control
Empowering employees by providing clear standards and expectations
Improving the consistency of products being delivered to customers
Keeping the company and employees focused on what’s important
Having standards that are administrated by an international organization and used all over the world
He realized that being an ISO certified company is a big deal. It sends a clear message to customers and other companies that the products being sold are worth buying. Products made by these companies are almost always more expensive, yet they usually have no problem competing with cheaper versions. This happens because non-ISO certified companies often take shortcuts in production or quality control and don’t earn the same level of trust.
John took a deep breath. It was clear there were many ways his company hadn’t actively worked to build value in its operations. His advisor reminded him that these and other initiatives were opportunities to make operations more effective, to reduce the risk of his investment, and to increase company value over time.
Our next article examines how John can add value by taking a strategic approach to the finance department.
By H. Barry Goodman CPA CEPA CMAA CVGA
Managing Director, Birkdale Transition Partners
Copyright: Cannot be Reused without Author’s Permission
Birkdale Transition Partners LLC is the objective source for those seeking business sustainability, growth or considering a business transition. Our goal is to ensure business sustainability and to maximize the value of an enterprise before any transition or transaction. Business owners without a transition plan often are unable to sell or transfer their company at its highest value. We help them to balance a company transition with the owner’s personal goals. Then we work with them to avoid problems caused by the lack of planning and/or not recognizing what needs to be added, corrected or modified before then.
Birkdale is unique because it only offers an unbiased assessment and solutions for the company owner. We do not sell any other products or services, so are a fee-only firm. We work in partnership with the company’s current professional advisors and staff. Because we help companies increase their monetary value, owners view our assistance as an investment—with payback and payout occurring during and at the conclusion of an engagement.
For a no-obligation, confidential discussion of your situation, please contact Barry Goodman at 312-626-1820 or contact us.
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