The creation of enterprise value, the key to shareholder value maximization, is primarily dependent on the creation of Human Capital. That has been my conclusion for some time, and according to Andrew McKenna, Chairman of McDonald’s Corporation, whom I heard speak this Tuesday, it seems to be his opinion too.
Mr. McKenna identified three key roles for the board of directors: Succession planning, talent acquisition and talent management. Without these, an enterprise has no viable future. With these, in time it will build the Structural Capital and Relational Capital it needs to prosper.
Lower middle market companies commonly suffer from a key man (or woman) issue. This is really just a lack of succession planning. To build a valuable enterprise, we must hire, train, and nurture our successors.
In his first job, Mr. McKenna went to his boss to resign. His boss asked why. Mr. McKenna said he wanted to start his own company. His boss asked what kind. McKenna said, the same as yours, I’m going to be your competitor. His boss asked who was going to finance it. McKenna said he thought he could find financing. His boss said, let me finance it. McKenna asked why. His boss said, I want you to be successful so you can buy my company. And thus began Andrew McKenna’s rise in the corporate world.
A failure to build your company to a size that is self-sustaining isn’t an easy thing to do. But dental practices do something different but similar all the time. During his or her career, a dentist builds Relational Capital, as well as some Structural Capital (the office, systems, assistants, equipment, etc).
But the dentist is the talent, and when selling a practice, a new, talented dentist is sought out by the current practitioner to acquire all or part of his practice over time, thus harvesting some of the inherent Relational Capital built up over a career of quality work. Since the buyer must be successful, the seller must seek out talent, manage it, and in the process set up his successor and buyer. In so doing, he maximizes the value of his company in the sale process, as it is sold over time.
The maximization of the enterprise value affects everything else: the ability to raise capital, the value in mergers and acquisitions, and the resistance to financial distress. It is common for an entrepreneur to be either the key salesperson or an inventor with a technical background. Neither tends to focus on their succession plan.
So, regardless if you are the head of one of the largest enterprises in the world, or the smallest, the same principles apply. Talent acquisition, talent management, and succession management are the keys to value creation. To learn more, contact us
by Charles SmithMr. Smith is the founder of Pegasus Intellectual Capital Solutions, a boutique investment bank specializing in mergers and acquisitions, Capital Raising and restructuring and workouts. The firm is an innovator in the use of Intellectual Capital Audit for pre-closing due diligence and in turnarounds. Charles can be reached at firstname.lastname@example.org