Our family business clients naturally want to know what their business is worth today. But an even better question asked by many of them is what they can do today to make their family business more valuable tomorrow. While the specifics of value creation are unique to each business, we like to use a common framework to help our clients identify pathways for creating value.

The framework was developed many years ago by the founder of our firm, Chris Mercer. Chris has an inordinate affection for acronyms rivaled only by his enthusiasm for pickleball. So, with a big hat tip to Chris, we’ll use this first post of the year to ask whether your family business is READY for 2022.

• Risk. Investors don’t like risk. Given the choice between two investments that offer the same reward, investors will always choose the one with less risk. The best way for investors to manage risk is through diversification, but family shareholders are often not very well diversified. As a result, family business directors need to be especially vigilant about managing risk within the family business. The most common risks facing family businesses relate to concentrations, which can take many forms: management, customer, supplier, geographic, product, etc. What strategies are available to reduce the risk of your family business in 2022?
• Earnings & cash flow. Investors like cash flow. In fact, investments are valuable because of the expectation that they will generate cash flow, whether in the next week or the next decade. Cash flow is rooted in earnings. Earnings depend on revenue and margin. Revenue measures how much business your company is doing, and margin measures how efficiently your company conducts its business. While earnings are the wellspring of cash flow, they are not cash flow. Among the most important decisions family business directors make is how to allocate earnings between cash flow to shareholders today and reinvestment to fuel greater cash flow to shareholders tomorrow. Is your family business profitable enough to provide current cash flow to shareholders and make appropriate investments for the benefit of future generations?
• Attitudes, aptitudes & activities. Investors like discipline. Founder-led businesses can be highly profitable, but not necessarily very valuable if the “secret sauce” is tied up in the personality and unique gifts of the founder. Family businesses that have successfully converted the unique attributes of the founder into repeatable and transferable business processes are worth more than those that cannot, or do not, make that leap. Do you have the right people in the right places doing the right things over time? To borrow an overused cliché from the popular business press, how “scalable” is your family business?
• Driving growth. Investors like growth. Yesterday’s earnings and cash flow are, strictly speaking, irrelevant to investors, who care only about the future. The value of your family business is determined by the view through the windshield, not the rearview mirror. What are you and your fellow directors doing to prepare for the future? Does your family business have a disciplined process for identifying, evaluating, and paying for investment opportunities that will generate growth in future cash flows?
• Year-to-year comparisons. Investors like a clear story. Hollywood is obsessed with making prequels to satisfy the curiosity of moviegoers for the “backstory” of their favorite characters. Historical financial results comprise the “backstory” for your family business. Is there a coherent narrative arc from what your family business has been in the past to what you are planning for it to be in the future? This is where strategy becomes critical. What aspects of past strategies will you carry over into the new year? What pieces of your current strategy should be cast aside? What new strategies will be necessary for your family business to thrive in 2022?

The new year is upon us whether we are READY or not. Give one of our family business professionals a call today to kickstart a conversation about how to increase the value of your family business in 2022.