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Capital Ideas for Private Business

Ten Steps to Improve Business Value

Getting Ready

By Marc Borrelli , Managing Partner
Atlanta Office, Corporate Finance Associates

leadershipWe recently asked over 300 private equity investors “What do you look for when buying a business?” As a general rule, private equity groups (PEGs) buy market leaders, companies who rank one or two in their respective sectors. Interestingly, these “best in class” companies have much in common not the least of which are the quality of their management teams and a sustainable competitive advantage. Even if you are not planning a business sale today, addressing these top two concerns of business investors can help improve your bottom line and improve your prospects for any future sale.

Here are steps you can take today to both strengthen your management team and improve your competitive advantage.


Most investors want to partner with talented managers and skilled employees. Many will even require management to remain with the company as a condition of the deal. Some will offer them the option to participate in the equity of the new company or an incentive program in return for their loyalty. The bottom line is this: the quality of a company's leadership is critical. And that doesn't just mean the company's owner/president: it includes the executive team, directors, managers and supervisors. Consider management's job description: make a profit, create valued products or services at a reasonable cost and provide rewarding employment opportunities. That's a big job—how does your management team measure up?

Developing and keeping a strong management team must be part of your business strategy. People are a company's most valuable asset—and finding, attracting and retaining talented management is very difficult for companies of any size. It must be an ongoing initiative.

1. Quality of Management

Begin by hiring people who already have the qualities and characteristics of strong performers. Then make sure the right people are in the right jobs. (You may have learned the hard way that successful sales people are not always successful managers.) Finally, invest in training managers to become strong leaders.

2. Knowledge of Industry

Your management team must know your industry. However, competence is more than just expertise: to be a market leader, you must integrate your company's skill into a customer-focused solution. Your competitors can match your knowledge, but it's not as easy to duplicate an enthusiastic management team's ability to translate know-how into customer service.

3. Input into Strategy and Planning

Share your vision for the company's future with managers and tie performance incentives to that vision. Then, involve managers in your company's strategic planning, so they have a stake in the company's future. Your company will be successful when your management team is excited about the vision and growth potential of the business.

4. Depth of Management

Expect managers to lead the workforce. Give them authority to make decisions—and demand that they refuse to accept mediocrity. While delegating authority is difficult for many small business owners, it is the key to moving beyond a “good enough” culture, to one in which all employees strive to contribute to the company's success.

5. Compensation Methods

Offer competitive compensation and benefits that are equivalent to that of similar positions in public companies. Provide career opportunities so that managers don't feel they are stuck in a dead-end job. For most employees, the “number one” career concern is not money, but control over their own destiny.


What is a Sustainable Competitive Advantage?

A company has a competitive advantage when it achieves above-average profitability by offering a unique product or service in its industry. In our free-enterprise economy, competitors don't waste a minute in copying another company's success—and the principle of supply and demand tells us that this practice will quickly drive down the original company's earnings.

A company has a sustainable competitive advantage when its unique offering generates a long-lasting performance that other companies cannot easily reproduce.

Begin by defining your unique value proposition (what you do better than anyone else) and your specific customer target (who you're serving) and wrap it up with your primary goal: superior profitability. Then stick with it.

1. Understanding the Market

Maintain continuity to your strategy—and continuously improve. It's critical to keep a pulse on your market to understand what customers are buying, what they want, and how things are changing. Recognize that the market is ever changing and your business must respond, without losing its focus.

2. Recognizing and Dealing with Competitive Threats

Make it a priority for your management team to be aware of what the competitors are doing. Stay current with economic conditions and other outside influences that could affect your business. Anticipate, anticipate, anticipate!

3. Potential of Disruptive Technology

Be aware of “disruptive technology,” in other words, innovations that displace current solutions, but be wary of overreacting. Obviously, you must anticipate new products and services, and shift your offerings to keep pace with new developments. At the same time, recognize that, even with new technology, the fundamentals of running a business don't change that quickly.

4. Market Growth

Evaluate new ideas against your company's plan—and cultivate an environment of innovation. Constantly look for ways to improve current products and services, as well as breakthrough ideas that launch your company into new markets. Whatever you do, be the first—speed to market is key.

5. Breadth of Customer Base

The rule of thumb is that if no single client should account for 40 percent of your revenue. If that client stopped working with your company, it would have a huge impact on performance. Analyze your customer base and reduce your risk.

Integrate these steps into your overall business strategy and most importantly… stick with them.


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