CEO’s have a simple job description: Increase the value of their business. Everything must point towards increasing value — from how employees are managed to the company’s environmental practices. The ultimate test of the CEO’s performance comes when it is time to sell a business. This is an easy measurement for publicly traded companies. But it is far harder for the vast majority of American businesses — the small mom and pop shops that make up the overwhelming number of jobs and contribution to our GNP.
I’ve spent a great deal of time during the past two years evaluating businesses for sale or in financial distress. Along the way, I factored receivables for a few dozen small retailers – and luckily pulled out before a few of them went bankrupt. During this time I also went through the everyday struggles that face middle-aged athletes: How to stay competitive without injury? How to recover from injuries? How to keep from gaining weight? And… How to I maximize my competitiveness (value) against younger athletes?
There are remarkable similarities between the valuation methods for small businesses and the performance measures for middle-aged athletes: Both to seek new ways to grow. Both tend to fall into ruts of behaviors that don’t maximize benefits (profits for business and happiness for people). Both are encumbered by their own particular situation and environment. Both have a tendency to be fat – especially if they have survived into middle age. And both suffer horrible results when they lose focus and try to do too many things.
Unlike the vast majority of middle-aged athletes (like me), Businesses can be bought and sold. This is where I usually encounter them. Before buying the ultimate question is: What are they worth?
Recently, I was asked to facilitate a seminar on small business valuation for a group of CEOs in San Diego. Just after completing my daily entry into my workout log I noticed that business valuation and fitness are very similar: Both require multiple metrics to gain a meaningful view on value.
Most exercise physiologists agree there are 5 types of fitness:
1. Muscle strength (anaerobic) – e.g., what you can lift.
2. Muscle endurance (aerobic) – e.g., how well you can process oxygen
3. Muscle speed (plyometric) – e.g., how much power you can generate
4. Flexibility (range of motion)
5. Body composition (% of fat to muscle)
(FYI — today’s exercise included three entries: a short 30 min. power-lifting session, a slow 3 mile run and 30 min. of high-intensity interval training session called a “Tabata”. So, I worked on strength, endurance and speed.)
To be competitive, each sport requires a unique blend of all five type of fitness. For example, marathon runners need a lot more endurance than strength while gymnasts need a lot more flexibility and speed than they do endurance. Almost all sports require similar body compositions; usually in the 5 to 8% body fat for elite men and 8 to 12% for elite women.
Companies have similar metrics that correspond to fitness:
1. Strength can be measured by net profit margin – e.g., how much money is your business making. Size matters. $1 in profit from a $1 dollar investment is far more impressive than making $1 from a $100 investment. So, dividing net profits by investment gives a more meaningful measurement: Return on Investment (ROI). Similarly, a 100lb woman bench pressing 150lbs is a hell of a lot stronger than a 200 lb man pressing 250 lbs. So strength is best measured by looking at the athlete’s weight to strength ratio. How much does the athlete weigh compared to how much can they lift in a given movement? For example, leg strength can be measured with squat presses and chest strength with bench presses.
2. Endurance can be measured by the net present value of customers – e.g., how much money is each customer worth to the company over the life of the relationship. All other things being equal, if a company has many customers that stay with the company for a long time then it is more valuable than a company that can’t retain relationships over a long period of time. Physical endurance is tricky to measure since few of us will ever push ourselves to the point of total exhaustion. A safe and relatively fun way to measure physical endurance is a timed century (100 mile bike ride). Bicycling is a relatively flat playing field when you eliminate the technical aspects of racing in a pack, drafting and team positioning. One-on-one the efficiencies of a novice bicyclist and Lance Armstrong are surprisingly close (less than 3% difference). Another way to measure endurance is to do what we were born to do: Run. Any distance that takes more than 45 minutes to complete will reveal your endurance. I’m a fan of a 7 mile canyon run near my house – far enough to be challenging but short enough to avoid repetitive injuries. Also, it’s fun to be in nature.
3. Speed can be measured in many ways for businesses: How fast you can turn-around a proposal, how fast it takes to resolve a customer complaint, or how quickly management responds to problems. Physical speed also has many measurements. The simplest is, again, RUN. Any distance that takes less than 3 minutes to complete is a good test of speed because it taps into what is called your anaerobic capacity – how fast you can expend energy. Taking your body into anaerobic zones for any length of time (more than a minute or so) will hurt. But it’s worth it. The speed tests I think is best are the 400 meters for slower runners and the 800 meters for trained athletes – just long enough to know where your threshold really is.
4. Flexibility can be measured by the rate of innovation for a product or service. For example, a company that can quickly adapt to change is worth far more than companies that are stuck in “the way we have always done things.” A good measurement is the product development cycle time. For example, General Motors takes almost twice as long to develop a new car as Toyota. Their respective competitive positions are partially the result of this disparity. Physical flexibility is simply measured by your range of motion. For example, how far can you touch the ground in front of you with your legs locked straight? This tests the range of motion in your hamstrings and lower-back.
5. Body composition for businesses is the most straightforward: It’s called the net worth and is calculated by subtracting total liabilities from total assets. This gives you the amount of equity (muscle) in the business. Net worth is a lot like talking about body fat composition – a primary focus of body builders. Yes, 8% looks better than 12% — and it turns out that lower body fat is closely correlated to injury-prevention, longevity and overall athletic performance. So it matters for more than just bodybuilders.
So, as an athlete, what are we worth?
Like a business, we must measure and monitor what we are doing. This daily accounting provides a constant set of metrics that shows progression (at best) and reasons for failure (at worst). And like accounting, it must be interpreted correctly. I recommend logging workouts based on the time spent in each of six categories: strength, running (high-impact endurance training), bicycling time (low-impact endurance training), speed (plyometics and other anaerobic training), flexibility training (e.g., Bikram yoga) and “other” (which includes things like playing sports or boot camp work outs). My goal for the month was to get more fully recovered from injuries by increasing my focus on flexibility. My plan was to split my time as follows: 20% strength, 10% running, 10% cycling, 5% speed, 50% flexibility, 5% other. Here’s what I actually did in March 2010:
|Total Strength Time||Total Run Time||Cycle Time||Total Speed Time||Total Flex Time||Total Other Time||Total Time|
|% Strength Time||% Run Time||% Cycling Time||% Speed Time||% Flex Time||% Other Time||Average Time/Day|
In addition, I track the calories spent per day and calculate the intensity of each day’s training and the variance of training intensities:
|Avg Cal/day||Total Cal||Intensity of Workouts
|Intensity Level (Cal/Hour)||571|
|1st Std Dev||653|
|3rd Std Dev||815|
I finished the month of March 2010 injury free and feeling strong.
From this, I know the following:
1. Too much time running, not enough in yoga or cycling (my girlfriend wanted to do a marathon… a subject for anther blog entry on completing goals).
2. I had a good mix of moderate intensity workouts.
3. I did a good job of mixing up my workouts.
4. I thought I was ready to increase my intensity and durations on “Other” (such as boot camps) and “Speed”
At the end of March, I also knew that I was worth more than when I started – something that every entrepreneur is happy to report!