May 17, 2023

9 Ways to Destroy the Value of Your Company

Driving value for a business is easier said than done. Without a deep understanding of value enhancers and detractors, you are more likely to make mistakes that destroy the value of your company and leave your business vulnerable and exposed. Being proactive by learning and avoiding these common mistakes will protect your interests, secure your future and, ultimately, help increase the value of your business.

1. No Organizational Strategy

Lack of a coherent, simple, focused strategic plan that is communicated throughout all levels of the organization is a sure way to veer off track and lose productivity and value. Your plan should be detailed and realistic. It should include specific steps that you will take to achieve your goals.

A focused strategy will bring to light the drivers of business value. “A strategic plan should include no more than three to five annual objectives, and these objectives should be clearly communicated up and down the organization. Having too many objectives is almost as bad as having no objectives,” said Jack Nugent, Partner, Argosy Private Equity. The impact of these value drivers should be assessed, and initiatives should be identified and implemented to reinforce the drivers. Without a strategic plan, it is difficult to make progress and stay focused on growth and long-term success.

"A strategic plan should include no more than three to five annual objectives, and these objectives should be clearly communicated up and down the organization. Having too many objectives is almost as bad as having no objectives"

- Jack Nugent, Partner, Argosy Private Equity

2. Weak Value Proposition

A value proposition lays out the benefits of your products and services and differentiates your company from the competition. A good value proposition should be specific and consistent across all internal and external channels, and every person in the organization should be able to articulate your company’s value proposition.

Attracting price-driven customers should not be the focus of your value proposition, as this will limit your ability to enact price increases when needed. “Selling based on value and benefits, not price, should be the goal of the sales team and the entire organization,” said Lane Wiggers, Managing Director/Operating Partner, Argosy Private Equity. Focus on the aspects of your business that set you apart and showcase your benefits to avoid the pitfalls of a price-based value proposition.

When you create and live by a benefits-focused value proposition that drives all aspects of your business, you can achieve bottom-line results that aren’t exclusively tied to the cost of your offering.

"Selling based on value and benefits, not price, should be the goal of the sales team and the entire organization"

- Lane Wiggers, Managing Director/Operating Partner, Argosy Private Equity

3. Ignoring Your Customers

Customers are the heart of a business. Lacking an intimate knowledge of who they are and what they want is a common mistake that impacts value. Invest regularly in Voice of Customer (VoC) market research like surveys, focus groups, and customer feedback to ensure that you are meeting consumer needs and your brand perception remains positive. Make adjustments where needed, so your offering resonates with your audience and drives engagement, loyalty, and sales.

Customer concentration is another surefire value detractor. Customer concentration increases risk due to a reliance on a small group of clients to account for a large share of your revenue. Expand your customer base to diversify your revenue stream, reduce risk, and make your business more attractive to potential investors. Customer concentrations above 30% can meaningfully decrease multiples that buyers are willing to pay for a company. A $5 million EBITDA business will likely sell for more if its largest customer is only 5% of revenue compared to a similar $7 million EBITDA company with a 40% customer concentration. Customer concentration can really kill value, even if the concentration is spread across multiple locations and multiple decision-makers at the same company.

4. Disconnected Leadership and Poor Culture

A business is only as good as its leaders. An effective leader needs to communicate effectively, set clear goals, and lead by example. They should also be willing to adapt to changes and make tough decisions when necessary.

Leaders who make it about “me” not “we” will see their company culture suffer. Poor leadership can result in a decrease in productivity, increased turnover, and difficulty in attracting top talent due to a damaged reputation from word-of-mouth and on business review sites like Glassdoor. Investing in employees and creating a positive work environment with accessible leaders and a team mentality can help prevent a negative company culture that will ultimately affect value.

5. Messy Financials

Finance is the glue that holds organizations together. Poor financial transparency increases risk for a buyer and can–and likely will–decrease value. Monthly financials are a great “habit” that all organizations should form. In addition, while expensive (and annoying), getting audited financials is almost always a surefire way to increase value when it comes time to sell your business. It helps to reduce the level of risk, whether real or perceived, for the new buyer.

Underinvesting in finance and accounting talent can leave you in the dark when it comes to the costs of doing business. Having the right financial experts in your organization can help you avoid making poor decisions that detract value. Without a skilled finance team and organized accounting systems in place, you will not be able to effectively manage risks and drive growth. After all, you can’t manage what you can’t measure.

6. Supplier Shortsightedness

Supplier relationships play a significant role in the value of a company. When executing a contract, it is critical to get the best possible payment terms from your vendors. But beyond that, the scope of the contract should be carefully dissected to ensure that you avoid other value detractors, such as agreements that lack forward visibility and long-term obligations that don’t take into account an inflationary environment.

Supplier concentration is another factor that can destroy company value. If the pandemic-forged supply chain disruptions taught us anything, it is the necessity to build a resilient supply chain by diversifying vendors and having pre-vetted back-up options. Future-proofing your supply chain will ensure that there is no costly disruption in service and can create competition that leads to reduced costs.

7. Seasonality Mismanagement

Seasonality, or fluctuations in sales or expenses that occur regularly during certain times of the year, can have a significant impact on your bottom line. Investors often take seasonality into account when valuing a company, so it is essential to understand how it affects your business in order to make informed decisions to limit any potential negative impact and maximize value.

Companies that are able to effectively manage seasonality and generate consistent revenue throughout the year are more attractive and more likely to maintain a higher valuation. This can be achieved by diversifying products or services, expanding into new markets, or implementing marketing strategies to drive sales during slower periods. By understanding the seasonality of your business, you can better predict and manage inventory, staffing, and make smarter capacity-related decisions to reduce costs and increase revenue.

8. Dated Policies and Practices

Organizational policies that do not factor in the latest regulatory requirements and social and ethical practices can be a big value detractor. Ensure your business is compliant by prioritizing and implementing policies to address important issues including Environmental, Social and Governance (ESG) and Diversity, Equity and Inclusion (DEI). Neglecting these issues can lead to non-compliance penalties, negative reputation, poor workplace culture, decreased sales, and a decline in value. Showing that your business is committed to more than making a profit will engender a positive response both inside your organization and with customers and investors.

"Change can be painful, but it is necessary to stay ahead of competition. If a company does not adapt, its competitors will"

- Don Charlton, Deal/Operating Partner, Argosy Private Equity

9. Failure to Adapt and Invest

The business landscape is constantly changing. Adaptability is essential to stay relevant. Your business needs to be able to quickly and nimbly adjust to changes in the economy, environment, technology, regulations, and customer behavior to be sustainable. “Change can be painful, but it is necessary to stay ahead of competition. If a company does not adapt, its competitors will,” said Don Charlton, Deal/Operating Partner, Argosy Private Equity.

Always be on the lookout for new technologies, trends, and practices that can improve your products or services. Ask yourself what investments–people, equipment, systems, etc.–can be made today to drive future growth? And be willing to invest in research and development to stay ahead of the curve.

One such critical investment is integrated technology platforms. Data is king, but only when it is properly operationalized. You need to be able to effectively analyze your data to unlock business intelligence and deploy it to drive your strategic focus and increase margins. Disconnected or out-of-date systems can create roadblocks to realizing opportunities for growth and building value.

Business Partner Takeaway

It is important to remember that even small mistakes can have a big impact on the value of your company. The formula for value creation and sustainability is complex with many moving parts, including a strong strategy and value proposition, engaged leadership and culture, a solid financial team, an intimate understanding of customers, vendors and seasonality, up-to-date policies and practices, and a commitment to continuously adapt and invest. An engaged organization will work as a whole to achieve these goals and help your business grow and thrive.

Connect with us to learn more about how Argosy Private Equity can help you navigate complex business environments and build value in your company.