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The
Consulting Practice
Building Value in Closely Held Businesses
The
Overview
The purpose of this guide is threefold.
The first is to outline the nature of the closely held
enterprise. Secondly to identify the generic problem
associated with building value in the enterprise, and to
provide insights or directions to follow in seeking a
solution. Lastly to provide a consulting process to be used to
assist the owners in building value by implementing the new
ideas gained from the insights.
Most closely held businesses begin as
experiments in self-employment. As a self employed person the
owner is engaged in all of the normal operational activities
of the business; but in addition now has to address the
administrative, regulatory and business development work.
Since most self-employed owners were once employees of other
businesses, they have been conditioned to think and act as
employees. Therefor the first, and initially most difficult
transition for them to make, is to that of a business owner
rather than a self employed employee. This is difficult
because they were probably good at what they did and want to
default back to the technical/operational role of employee.
They also usually avoid the other less familiar aspects of
owning and running an enterprise. Regardless of the nature of
the closely held business most still operate with the owner in
a vital daily operational role. The owners for the most part
have made the businesses dependent on them. What they don’t
realize is that in so doing they compromise the very value
they wish to build.
There are two principle aspects to be
evaluated in relation to value building in a closely held
business. These are productivity and growth. Everything else
is secondary. Productivity addresses the issues of the best
systems and processes and the best people. These can be
purchased, or hired, or the business owner can create them.
The growth aspect is addressed in terms of the marketing
corridors selected, networks developed within the corridors
and chain reaction impacts. The chain reactions are created
through daily work activities through the networks into each
corridor. The work therefore in the productivity and growth
areas (and sub sets of it) can be evaluated to determine the
variables effecting the strength of the firm. It is this
strength (lack of variables) that will determine the risks
inherent in any given firm. These risks are the key factors
used to determine the ‘Going Concern’ value of the firm.
Therefore if you can identify the variables/risks and
permanently engineer them out, you can increase the ‘Going
Concern’ value of any closely held business.
Earnings predictability is a key factor
with any closely held business. The more predictable the
earnings pattern the more value the firm will generate. As
most closely held businesses are small to medium sized
enterprises, operating in the economy at large, earnings
predictability becomes difficult. Budgets are the first step
toward gaining some control. They are, however, not always
effective as they are usually built based on guesswork in the
revenue/sales area. The typical budget is not a plan for value
building or
earnings creation as much as a vision of
sales potential (Revenues) and a spending pattern (Expenses).
The typical budget does not, therefore, give the business
owner a tool for creating earnings and value. If one could
identify such a tool then one could improve the capability of
the firm to outperform the marketplace and increase in value.
Such a tool does exist and has been field tested by our firm.
The purpose of this guide is to give the
consultant or business owner a means for increasing business
value. It leads off with a restatement of the generic problems
contained in this overview in list order. Following this is a
list of insights that address these generic problems. From
these insights comes the consulting process developed by the
J.R. Hull Co., Inc. to be used to overcome those situations
that are causing a negative impact on business value.
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