Four years after the worst of the COVID shutdowns and COVID benefits, the labor market appears to be calming down. COVID demonstrated the importance and business value of having a skilled, loyal workforce.
“A great system is when average people get outstanding results every time.”
– R.V. Caruso
However, the most important part of any system is skilled people running it. That does not happen overnight.
What is intangible value?
First, let’s start with the basics. Intangible value is all the value of your business that is not identifiable tangible assets. A tangible asset is a chair or a building. It can be touched. Intangible assets are things such as software programs, procedures that are in place, and goodwill because people know and call you—namely, anything we cannot see or touch.
What really creates intangible value?
When we talk about business value or investment value (tangible or intangible), we are talking about the likely future cash flow from an asset. This asset could be rent from office space or profits from a company providing services. For operating service businesses, this future profitability is usually about the people or employees who maintain and grow the company.
Companies need people to keep updating and improving what they offer. Then, they need more people to sell, manage, and lead the product lines or offerings. Otherwise, the overall company and its value would quickly fall as customers move to newer or easier-to-use products and services. (Remember the decline of the Blackberry for the iPhone?) All companies need “forever and continuous improvement,” or they will get left behind—sometimes very quickly.
Your employee’s improvements to products and systems create your intangible value over time.
How can you increase your intangible business value through your employees?
Good employees are always important to business operations, profits, and value. There are simple (but not easy or fast) ways to increase your business’s intangible value through your employees.
- Hire the best. Train people, grow them, and keep them. This is hard work, and if you are successful, you will lose the occasional well-trained person, but really, what is the alternative? Many successful companies have programs to develop growth plans for every employee. These are not just plans but roadmaps for frequent training, reviews, and skill development to carry the employee and company forward.
- Compensate them well. I say compensate rather than pay because benefits like flexibility, titles, and non-monetary compensation (e.g., retirement plans or health insurance) are often just as important as salary. Remember, your competitors are lurking for your stars, and they will pay more—at least on the hire date.
- Create benefits that lock employees in. For instance, if your company gives large bonuses, pay the bonus over three years in thirds. If an employee chooses to leave, they are also leaving a big bonus behind. However, remember that you must pay them the full bonus if you need to lay them off. Another option is to create a stay agreement, where the employee receives a bonus if they stay for two years under new ownership. After all, ownership can change for voluntary or involuntary reasons.
- Remember the huge cost of new hires. Although you are hiring the best, they will still need time to adjust to your company. They are even more valuable when they are found, trained, and up to speed. Don’t be chintzy with your best people.
- Hire slow and fire fast. This might be the most important advice for any business owner. Back to point one–hire the best, even if it takes time. Then, don’t be afraid to let people go. How often has a hire who did not feel like a fit at the end of the first week made it on the team? Yet I bet you put tons of time “trying” to get it to work. Let those people go after two weeks, maybe even with two weeks’ pay (it’s still cheaper), not six months later.
- Contractually protect yourself. Note that this has become more contentious. Seek legal advice on all legal matters, particularly non-competes. In most jurisdictions, properly prepared non-competes or non-solicits can give some degree of protection to your firm from the loss of clients that might leave with a key employee. We believe these employees should be able to work in the field but not take your clients and software. The specifics of these provisions vary by state, so ask your lawyer.
Creating business value for your company through employees means using the carrot and the stick. Take your time to hire great employees. Then, provide training, compensation, benefits, and contracts that keep them around and grow them and your business. Finally, don’t be afraid of letting employees go if they don’t fit, no matter how hard it is.
Employees are the most important part of a service business’s intangible value. Protect that value.
Contact me to learn more about ESOP, Estate and Gift, SBA, and exit planning business valuations.