Family business owners don’t stay on top by having all the answers but by having the ability to ask the right questions. A natural question our family business clients want to know is what their business is worth today. However, 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.

Our founder, Chris Mercer, has been around the block once or twice after beginning his valuation career in the late 1970s. He developed this specific framework over ten years ago, which is just as applicable today as it was then. So, before the last-minute Christmas shopping becomes the main priority, we’ll dive into his framework to ask whether your family business is READY for 2025.

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, including management, customer, supplier, geographic, product, etc.

If you can reduce risk, all other things remaining the same, you can increase value and make your business more attractive to potential buyers. What strategies are available to reduce the risk of your family business in 2025? There is no “right” answer for where or how your family should invest. Ultimately, your family’s risk tolerance and return objectives will determine the right option for your family business. However, your family needs to have a process for objectively estimating expected returns and analyzing the riskiness of its options.

Earnings & Cash Flow

Earnings are important for investors. Cash flow is rooted in earnings. Earnings depend on revenue and margin. Revenue measures how much business your company generates, 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 essential 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

The A in READY is all about the people in your organization. Do you have the right people in the right places doing the right things over time? How scalable is your family business? What is the attitude and culture in your business regarding sales, customer service, etc.? 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 transition.

Driving Growth

Make growth an intentional goal. Companies grow through tougher times when management is intentional about growth and stays focused on that goal. Growth does not happen for most businesses absent conscious decisions on the part of the family business owners and/or key managers. 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

Three important ways to look at any company are first, at a point in time. A second way is to look at the business itself over time. And third, look at the business relative to peer groups.

Historical financial results comprise the “backstory” of 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 2025?

The concept of year-to-year comparisons will help keep family business directors focused on the key trends that impact not only the value of your business and its attractiveness for sale but also the pleasure that can be derived from building a growing, thriving business.

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 2025.