If you own or manage a midsize company, do you have a firm understanding of its value? Right now, at this moment? Do you know with certainty how much value you created in the past year? Can you pinpoint where in your business value is being created and where it’s declining?
If the answer to any of these questions is “no,” you could be putting the future of your company at serious risk.
Recently, one of us (Reed) advised a family-owned company that operated three distinct business units, each in a different industry. Two of the units were doing well in promising industries while the third was lagging in a declining industry where valuations were at an all-time low and unlikely to rebound. Unfortunately, instead of devoting the bulk of their time and energy to making the well-performing businesses better, management had been consumed with trying to fix the struggling business.
The damage wrought by this approach became obvious only when the company was sold. Because the three business units were in different industries, the sale involved three separate buyers. The high-performing businesses fetched about $75 million each. The struggling business — the recipient of so much of their attention — reaped only $12.5 million.
Imagine what the value of the combined company could have been if management focused their efforts on the businesses worth improving by investing in creative talent and innovations, expanding the customer base, fine-tuning quality, and the like. In a few years, a targeted growth strategy might have enhanced those already promising businesses to the point that buyers were willing to pay a 25% premium, or $100 million each, instead of $75 million. Even if those investments required closing the third business down, the combined $50 million boost in market value would have more than compensated for the costs of shutting down a bad business.
While any company can make errors of this nature, family businesses may be at increased risk. Their rich histories and traditions (which are usually among their strongest assets) can become liabilities if emotional attachments cause leaders to hang on too long or resist embracing new directions. For such companies, clear, objective valuations offer essential reality checks.