Redefining Shareholder Value

One of the most frequent conversations I have is about what it means to be a shareholder. From existing shareholders considering their exit, to younger people inside a firm thinking about taking on ownership, there is always a discussion about the relationship between risk and reward. Within this discussion, the subject of shareholder value regularly comes up. I’ve come to appreciate that the current and prospective owners of SME firms, think about this subject differently to investors in their larger counterparts.

The traditional definition of shareholder value focusses on profit generation. Making profits. Bottom line, it’s financial. This is understandable, as the term is regularly used when discussing the financial return a company could/should produce. For public (and other larger) companies, their outside investors are doing so for this very reason.

When it comes to SME businesses, there are often alternative, non-financial definitions of value. The most familiar one is of course time. The great trade-off between time and money, will be familiar to many of you reading this blog. But what does it actually mean in real life? And how can you make better long-term decisions about how to find a good balance? The answer is to have a really strong grasp on your own personal plans and the role money and time will play in them.

Current Owners

You’re probably focussed on financial independence, accumulating enough money to never run out, based on reasonable forecasts of lifestyle costs, risk and capacity for loss, mortality and so on. If you’re a financial planner too, there is a good chance you’ve over indexed on tax mitigation and under-clubbed diversification. In other words, you’ve not taken enough out of the business over the years (for fear of paying too much tax), and now you need one big pay out in the form of the sale of your business. In this context, shareholder value is about the enterprise value of your equity, which will be calculated in some part by multiplying the profit your firm generates.

The above scenario may have come about because you didn’t want to take the risks (or do the work) associated with moving your firm into the next phase of business growth. In this scenario, you’ve accumulated profits over a number of years and likely have a healthy balance sheet as a result. This is another example of where SME firms differ from their larger counterparts. Why not just take the risk, hire someone that does want to manage the growth and crack on? No thanks you say. Fine as I am. Like my steady stream of profit that funds my lifestyle.

Prospective Owners

You’re probably focussed on becoming the best at what you do, while balancing work with other elements of your life. Critically, you’re probably not financially wealthy yet and have a very different perspective to someone that is. You’re also a long way from retirement and so the idea of financial independence is of little, if any importance right now. For you, shareholder value is likely to be about balancing time and money. Time to explore your career and maybe even business ownership, but also to explore the world, relationships, family, hobbies, community and all sorts besides. For you, shareholder value is probably defined equally by time and money.

In the real world, this often shows up in a desire to follow different working patterns. Taking more leave or regularly working a shorter week, or shorter hours. This gives you more time to do more of what you want to do outside of work. You might also want to work from home more, or live in a different country. Much of this goes against many of the established working patterns of the current shareholders of the firm.

Succession

This difference in how we define shareholder value, shows up in anger when working on succession planning. The founders of a firm are often very keen to preserve what they’ve built and perceive a sale to a third party as a bad outcome. And they are defining value in the monetary sense. The next generation of prospective business owners, rarely see the world the same way and can be reluctant to take on ownership, due in part to their differing priorities. They are defining value as a balance between time and money and over a much longer period.

Solutions

It’s important to start planning as early as possible. This should be so familiar as to sound like a cliché and there’s good reason. Succession planning involves the long-term transition of the commercial ownership of a business, the control and decision making within it and the practical responsibilities bound up in the owner’s day job. Getting an idea of different people’s requirements, establishing the current shape and value of the firm and forecasting future performance and value are all important elements of the planning process and help participants understand differing perspectives and incentives.

Once you’ve undertaken some planning, it will be far easier to be intentional. Develop an investment policy for the firm, set parameters around growth projects (ie required investment, breakeven point and expected return) and stick to it. Review regularly and remain aware of the different definitions of shareholder value and how this might change over time.

And it’s important. There’s nothing worse than pausing to reflect and realising that you have missed an opportunity: to grow your business, to achieve financial independence, to pass the firm to someone you really want to own it in the future, to do something important outside of work. If you want to make a start, try downloading one of our sketchbooks and using it have a think about your life and the business you own or might own in the future.

Personal Plan Sketchbook Business Plan Sketchbook

Leadership

Whatever the shape and size of your business, creating the conditions whereby everyone’s efforts are maximised towards the achievement of specific goals, is a critical occupation. It’s also incredibly challenging, particularly if you have more than one role to play in the firm. Here’s a selection of resources to help you lead your organisation forward.

Succession Plan Sketchbook

A planning tool that follows the LPP framework and helps when designing the optimum deal structure.

Download Now

Yearly Activity Planner

Use this template to map out your plan for the year. If you’ve completed the Personal Vision Sketchbook, then just extract the detail from there.

Download Now

Kingmakers Enterprise Strategic Process

A strategic planning framework designed to help owner/managers simplify the process of business planning and to promote firm-wide engagement and accountability.

Download Now

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Disclaimer

The resources in these pages have been produced for guidance purposes only. They are educational in nature and should not be construed as strategic or financial advice. We strongly recommend that you take advice from someone authorised to give it to you. Neither Kingmakers or any third-party contributors responsible for the creation of these resources, can be held responsible for actions taken as a direct consequence of the information in these pages.

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