I’m worried that the way businesses are bought, sold and valued has become a dangerous distraction to business leaders
I fear it’s not creating company value, but is actually destroying it.
How do you value a company?
The most common way to calculate company value is to apply a multiple to a company’s cash flow.
This is how most businesses are bought and sold and, in general, it works. Especially for shareholders.
Unfortunately it can be a problem.
Business leaders end up spending time worrying about numbers, instead of doing the work required to achieve desired results. Results are important, but they are just metrics.
Fretting over the forecast won’t make the results any more likely to happen. And it has no effect on business value.
Ode to the shareholders
The only ones who receive any value in a sale transaction are the shareholders (after repaying any banks). With this knowledge, leaders often focus on pleasing the shareholders above all.
With every decision it’s, how does this help the shareholders? What will the shareholders think? How does this maximize shareholder value?
It’s important to consider the shareholders, but there is nothing a leader can do for or to a shareholder that will make the company value increase. And the shareholders can do nothing to influence value directly (I’m keeping the employee and shareholder roles separate for simplicity).
It’s time for a new equation.
Gifts and company value
In Linchpin (affiliate link), Seth Godin writes about winners being the ones who give gifts. The companies who create and deliver what the market truly wants-that is gives gifts, are the ones who earn respect and attention.
Giving a gift makes you [a company] indispensable.
But since gifts to shareholders do nothing, we must turn to customers and employees (including leadership) as the only stakeholders who can increase a company’s value.
The new company value equation
Here it is:
Company value = value given to customers over time + value given to employees over time
The new equation is based on this simple truth:
Every interaction with customers and employees, current and potential, is an opportunity for leaders to build or erode value.
In other words, give gifts.
When a company exceeds a customer’s value expectations it has given that customer a gift. The customer will return for more gifts. After enough of these experiences the customer will tell other people about the gifts they have been receiving.
Each time a company exceeds an employee’s value expectations, the same thing happens. The employee feels gratitude and is compelled to give back. Most often employees will pay it forward in the form of gifts to customers.
Each gift given to customers and employees is a direct investment in company value.
When we deliver superior value to customers, profits follow. When we give value to employees, they take care of customers. The cycle repeats and you have a very valuable business that any investor or buyer will want.
Ironically, the less we dwell on company value and the more we focus on giving sincere gifts to customers and employees, company value increases.
In the end, this is what makes shareholders happy.