How Investing in Your Employees Leads to a Higher Valuation
“Train people well enough so they can leave, treat them well enough so they don’t want to.” -Sir Richard Branson
When a business valuation is performed, a business owner primarily focuses on the financials and business operations. Many fail to recognize their employees’ critical role in driving the business toward higher revenue. Sometimes, this oversight leads to a loss of business reputation, brand reputation, and poor business performance.
As a business owner, you steer the business; however, you must recognize that your employees act as its engine. They are primarily responsible for doing the work and ensuring that the business fulfills its goals. You must invest in employee growth, training, and overall well-being to fulfill those goals.
While there are several ways of investing in employee development, it is also necessary to encourage and support them.
Employee development can be defined as updating and expanding employees’ existing skills and knowledge. Through education, training, and mentoring, employees learn new skills and update their knowledge, which helps them execute more complex tasks and a more comprehensive range of tasks.
There are two-fold benefits of employee development. Since employees are continuously learning new skills, they are better equipped to take on higher roles and advance their careers. At the same time, the employer builds a capable team who will help attain the business’ financial and growth goals.
Employees directly impact these three areas of your business:
- The relationship with clients and customers
- The quality of work
- The pace of delivering your company’s products or services.
Employee development leads to improved company performance and reduced employee turnover.
Employees and Business Valuation
Ken Blanchard famously wrote, “Connect the dots between individual roles and the organization’s goals. People who see that connection get a lot of energy from work. They feel the importance, dignity, and meaning in their job.”
Employees impact business value in four key areas:
- Assets: Your employees are responsible for maintaining and efficiently using property, plant, and equipment. How well they take care of these assets determines what they will be worth in the future.
- Earnings and revenue: Employees grow business sales, increase efficiency, and reduce costs. A business’ success is the most significant factor in determining the purchase price.
- Growth: Your employees draw customers with superior service and supportâ€”their motivation and innovation help expand your business’s market share.
- Ownership mindset: According to Simon Senek, “When people are financially invested, they want a return. When people are emotionally invested, they want to contribute.” When owners create a positive, supportive environment, employees feel their contribution matters and are loyal and motivated to do good work.
Impact of Employees on Your Company
Unless you are exiting your company by liquidating it, your company’s value goes beyond the value of business assets minus liabilities. Employees who are instrumental in ensuring efficient operation and delivery of products and services are also responsible for the profit.
Increased Productivity and Business Growth
Your people are your most valuable assets; they are the organization’s backbone, instrumental in its success. Each employee contributes towards this success or failure.
Companies that focus on maintaining a high-development culture are bound to have a committed, results-oriented, engaged workforce. If workplace conditions are favorable, they are more likely to be happier. These positive reinforcements will help them become more productive, and the quality of its services and products improves.
Zappos.com, the online shoe and clothing store, which Amazon later acquired in an all-stock deal for $1.2 billion, is as well known for its products as its working conditions. Employees are offered $2,000 if they choose to leave employment after the first week of training. Employee appraisals are done after reviewing skill tests and improved capabilities. Separate funds are allocated for employee team building and culture promotion.
Such substantial benefits have built employee motivation, leading to great customer service, happy customers, and higher profits.
Solid Internal Operations
Despite a talented employee team, a disorganized company with unclear processes and unstructured goals will not do well.
If you want to unlock the true potential of your people, you must develop processes that will help them meet business goals. The way you run your business determines its state of operation. Poorly structured processes often result in poor employee decisions, ineffectiveness, and confusion.
A well-defined process offers smart, clear guidance. Good work processes focus on purpose rather than simply completing a task. That can be the most significant differentiating factor in determining how employees behave at work.
Employees stay longer with a company when they have ample opportunities for growth, a positive work culture, and respect. According to research, replacing a single employee is equivalent to 50 percent of the employee’s salary. If the employee is experienced, well-trained, and holds a key position, the replacement cost can shoot up 200 percent. High employee turnover is costly, as you will have to spend more time, money, and resources looking for a suitable replacement. Contribute to your businessâ€™s growth and success by reducing employee turnover.
If you add direct tangible benefits for your staff, you not only ensure their well-being, but you also limit negative trends like a big wave of employees jumping the boat and morale-damaging rumors.
Impact of Employees on Prospective Business Buyers
Because buyers know that employees are the backbone of a successful business, they look for a business with safe revenues in the future, a strong company brand, and internal processes that value the employees. Any business meeting these requirements is an ideal acquisition target.
Moreover, no buyer wants to buy a company that cannot retain its employees. A high employee churn clearly indicates poor work conditions and a lack of smooth internal operations.
When buyers look at your company, they consider the following questions:
- Is the staff experienced and capable of ensuring business continuity post-acquisition?
- Can they be trusted to work without supervision, if required?
- Are the key employees under contract? This will ensure that they stay with the company for a fixed period.
In a nutshell, investing in employee development activities means that your company has the best workforce. Begin by:
- Equipping your workforce with the tools and strategies to help them perform better at their jobs.
- Designing employee development activities focuses on an employee’s current and desired performance stages.
- Having the HR department identify the skills gap, organize frequent training to bridge that gap, and encourage employees to participate in these training courses.