The valuation of a business is an assumption of future productivity based upon the perception that the multiple value drivers at play within a business will continue.
An appraisal (of value) is simply an
- Analytical guess of the future productivity of current value drivers
- Supported by historical performance
- Combined with assumptions as to how those value drivers can be or will be impacted by future circumstances
Businesses have both social value and economic value. For the purpose of explaining how succession planning impacts value we will dwell upon classic economics.
The current economic value of a business lies in the
- Demand for products or services provided,
- Assembly and distribution cost of those services relative to sales price,
- Adequacy of financial resources to support product development, assembly and distribution
- Managers and leaders who are responsible for overseeing the business.
These are components of current economic value because the marketplace fully understands that all of these value components are depreciating.
- Products and/or services will become obsolete.
- Assembly and distribution of products will become inefficient and/or ineffective.
- Facility and technology demands will consume cash resources.
- And most important, as has been an unfortunately predictable cycle, leaders and managers who have astutely integrated the development of products, sale of products, management of cash resources and the infusion of winning attitudes will move on, retire, become distracted or lose their edge.
Consequently any presumption of financial value is temporary and conditional.
At some point these value drivers will expire unless they are being assessed, refined and as necessary, regenerated.
Of course, “all issues” includes value drivers which are part of the fundamental components of The Succession Matrix.
The predicate to succession is success, without success there is no need to build value, or a business that would be attractive to employees or next generation leaders.
Succession planning facilitates the enhancement of value drivers critical to sustaining business success. This process predictably demands refinement to products and processes and a commitment to providing the financial resources needed to support those products and processes. Furthermore, succession planning challenges the assumed progression of leadership and management because the foundation of Succession Success is confidence that the next generation leaders will have the competency, capacity and commitment to not only maintain the current business value but also reach full value potential.
In summary, Succession Planning builds value because the succession planning process focuses on achieving Succession Success. The process for achieving Succession Success, by its very nature confirms, refines and where necessary regenerates the drivers that constitute business value.
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