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I love it when an employee turns tables for me.
It's part of my life's work to spread the value acceleration mindset, helping businesses that can be successful also become relevant. Simply put, the Value Acceleration Methodology is a value management system that gives you a strategic framework for exit planning – and, therefore, business planning. Income is important to a business owner, of course, but the real focus should be on creating value—more on that later—so the owner is well-positioned when an exit comes to reap the wealth they've built.
Yet here I sat, in one annual review with a young, dynamic employee talking about the same old things we discussed in annual reviews: achieving goals, generating revenue, etc.
Until she turned the tables on me.
The review had gone well. She had achieved all of her goals, and I was offering a generous raise as a result.
Until she also wanted to talk about value.
It turns out that the Value Acceleration Methodology we embrace at my business, the Exit Planning Institute, was rooted in him.
Value from intangible
Value creation depends on the four intangible assets that every business has:
- Human capital: The strength of your people, how they execute, adapt and innovate, and how they can be positioned independently of you, the business owner.
- Customer equity: The strength of your relationships throughout your supply chain, with open communication and shared goals and benefits.
- Structural capital: The strength of your financial strategy, systems, processes and structure — and how well they are documented, validated, scalable and transferable.
- Social capital: The strength of your culture, creating a rhythm that continues and elevates your company.
So after we finished talking about the income goals she was able to help us achieve—a sign of success—she wanted to talk about capital and intangible value she was able to grow over the past year – an important sign.
Here's an example: She documented the elements of her strategy from the previous year and how it delivered on each of the organization's success factors. It produced more leads, resulting in more closed business, generating more revenue and creating a bigger and better brand.
But what she wanted to talk about was value. She had prepared a value sheet that showed how the strategy and success factors contributed to the four intangibles and, therefore, to the value of the business. She emphasized how she made the business scalable and predictable and how she could decentralize me from her department. Conclusion: She created value vessel.
In our line of work, value is a multiplier. Value helps businesses sell for 12 times net profit instead of five, for example. It also helps owners reap wealth when it's time to sell.
Related: Do you want customers to love you? Treat every customer as if they were your only customer
Change employee review
That one meeting changed the way we do our annual reviews. As an entrepreneur I am focused on revenue. But year-over-year income isn't the real wealth I'm creating in my business—it's the wealth I'll be able to reap when I exit. It's not a process that starts immediately before the sale – you have to create value continuously. And getting employees for it its own value – and therefore driving value – is one of my top priorities. We did it by changing the performance review from metrics an employee hit to value created.
How should you do it?
Step 1: Determine your values
We have seven core values in our organization, and they are based on the four intangibles I mentioned earlier, as well as other items that drive value for our business. We define them and use them as a guide in our reviews.
Step 2: Assess your values
We have managers evaluate their employees on how well they are living up to that value – by example. Employees earn one D for “demonstration” or a V for “visit”.
If the employee cannot derive any examples of how they created value within the core value, it is a V. They believe in it, but they are not demonstrating it. Employees should articulate how what they did—and the goals they achieved—added value to the company. It doesn't have to be quantitative, and often isn't. It could be about creating processes or how achieving a goal decentralized me as the owner so I could focus on higher order items.
Step 3: Reward value
Instead of a revenue-generating performance incentive, have a bonus structure that rewards driving value. It shows employees what really matters, and in the end, it's what makes your company important (and makes you more money in the end).
Beyond Review: Overall Value
Each industry has a code that the US government uses to classify your type of business. When working with one exit planner who is a CEPA, they can look up businesses like yours and tell you what multiple of net profit they are selling for.
Let's say the range for your classification is three to eight times net profit. Businesses that sell for three times their net profit are likely not focusing too much on incentive value, instead worrying about revenue.
In the end, when you can exit your company on your own terms, your year-over-year earnings will matter, but not as much as value. If your business is transferable, you have a great product, your culture is great and you have good customer relationships, you have created value. And that value is what the future owner is looking to buy – and will pay for.