The answer to that question is in the “value pyramid” below:
An owner driven business. In this type of business, the owner makes it all happen. Because this level of business is highly reliant on its owner, the risk of a business losing its profitability following a succession is highest. This business is not yet ready to sell. A potential buyer would certainly value the company below 33 % of its potential value.
A people driven business. In this scenario, key people in the company, other than the owner, make the business happen. At this level, succession-related failure is reduced, but still plays a role due to the fact that the key people could leave, and thus take valuable information, and even customers, with them. This business is almost ready to sell but a potential buyer would value this business at less than 66 % of its potential value.
A process driven business. This type of business is run by systems, which greatly reduce the risk of failure after a succession. At this level, systems are in place to ensure that operations continue according to plan, with or without the owner or key employees, so the business is set up fairly well to run itself. This type of business has more inherent value than the first two levels, and from a value perspective, is in sellable condition. And could reach up to 90% of its potential value.
A culture driven business. In this environment, the culture (driven by both people and systems) make the business happen. Level Four is considered as close to a pure “investment” as a business can come. Its culture indoctrinates new hires into an environment of continuous improvement, based on systems. The result is what we call, a “Culture of Excellence”. This type of business has the least chance of succession related failure, and is therefore considered the most valuable to a prospective buyer.
Gallup’s latest research shows that only 31% of employees are engaged at work (51% are disengaged and 17.5% actively disengaged). Analysis of the Glassdoor database shows that the average employee gives their company a 3.1 out of 5 when asked whether they would recommend their company to a friend (Bersin by Deloitte research with Glassdoor).
Investors believe that culture has a direct impact on the price of a business but what is culture?
Culture is the set of comportments, values, hard facts, compensations, systems, and routines that make up a business. A potential investor will be able to “feel” the culture of a business; for example if people demonstrate in their behaviours that they are enthusiastic, entrepreneurs and they are working in a beautiful and inspiring office space, conveying a sense of well-being , a potential buyer will certainly think that productivity is high and risk is low. S/he will be ready to pay a premium for the business
Other clues a potential buyer will look for: are people collaborating within the company and customers? Or are they working quietly in isolation? Do they arrive on time in the morning and leave when their time is up? Or are they flexible to better serve the customers? Is there a sense of rigidity or friendship?
To diagnose a culture we like to refer to the Competing Values Framework, by Kim Cameron and Robert Quinn, their research shows that most teams fall into one of four types. There are three issues we consider: type (what is your culture), strength (how strong is it), and conformance (how consistent is it).
Building a culture is a slow process but when it is built, it is omnipresent and hard to change. Climate can be changed quickly and will help building a strong, consistent culture. In a well-established and communicated culture people will know what to expect and will experience a sense of “ feeling good” if it is supported by the climate.
So you should create a culture in which employees are, valued, challenged, focus their attention and efforts towards customers and learning, explore their potential, fulfil their ambitions, achieve success, and are adequately rewarded, if you want to sell your business at a high price.
Ultimately culture is driven by leadership. How leaders behave, what they say, and what they value drives culture. If you want your transition out of your business to be smooth and successful, get a tremendous return for it, you should build in your organisation “quality and trust in leadership.”
When you focus on culture as strategy you find that some people just won’t fit, regardless of their skills and qualities. Do not worry people who do not fit will leave as they will feel alien to the environment. Culture will get stronger the more you reinforce it.
To create a culture you will need to look at how you evaluate and coach your employees. We recommend to use a performance leadership performance process to drive empowerment and innovation into the organisation. We call performance leadership processes the “magic potion” to building a highly engaged culture.
Remember also that great cultures are easy to understand. So keep it simple. If you can’t write your values and culture down in a few words, it’s probably too complex to understand.
Selling a business is like selling a home it needs to have a facelift so as the “house doctor” used to say you should “de-clutter” the work place first. This will not only give a good first impression to a potential buyer but it will help to improve the business compliance. New research by Deloitte Australia shows that financial services firms that focus on culture instead of compliance systems have better compliance.
Design thinking, agile and responsive workforce is all a part of simplifying work and improving corporate culture.
If you’d like to know how your company performs on The Sellability Score, simply complete the 13-minute questionnaire. It is free and confidential.
If you would want to know more on how to transition out of your business and would want to explore what you should do please do not hesitate to call Jean-Bertrand de Lartigue on +44 1656 766 363 or e- mail him at JB@macint.co.uk or visit our website www.exit-planning.co.uk