Invest in Human Resources and Increase Your Company’s Value
Co-Authors:
Scott Young, President and Principal Consultant at Highpoint CFO
Tom Muscarella, Regional Sales Manager at PuzzleHR
Overview
This article explains how effectively managed Human Resources (“HR”) increases your company’s value. Our goal is to ensure your HR function not only accomplishes the necessary tasks required to run your business but is an investment in the long-term value of your company.
You have a lot of options to manage payroll and hire personnel. Do you go with the least expensive option? Or is HR an essential part of the foundation of your valuable, scalable company?
A Buyer’s Perspective
To understand how your HR expenditures can be an investment, let’s look at it from the buyer’s perspective. A buyer of your business is primarily interested in two things:
The future cash flows they can expect to receive from your business
The risk that those cash flows will be different than expected
A simplified version of the valuation formula a buyer may use is as follows:
Net present value of a stream of cash flows
Let’s simplify this further, from a buyer’s point of view: Future cash flow is good, and risk is bad. If the buyer sees too much risk in your business, they will offer you a low purchase price or look elsewhere.
What is Risk?
To understand risk, recognize that a buyer wants to purchase a business with transferability, predictability, and sustainability. You may think your business has all of these things in place. It has provided you with a good income for many years and has good employees. That may be true, but let’s look at how a buyer might evaluate your business.
A prospective buyer will look at your business’s critical areas to see if you have transferability, predictability, and sustainability. These key areas include:
Planning
Leadership
Sales
Marketing
People (HR)
Operations
Finance
Legal
For example, you may have sales that are increasing every year. But, if you are the primary salesperson without a reliable sales team, can the buyer count on the business’ sales success to continue once you are no longer at the company? Or if you have great employees but don’t have formal employee agreements, will they stay after you sell the company?
You can see how each of these critical areas affects the price a buyer is willing to pay for your business or how it may make them look for other opportunities.
Why Think About This Now?
So, why think about this now? If you are thinking about how you hire, process payroll, stay compliant with HR regulations, and make payroll tax decisions, you have the opportunity to build a solid piece of a valuable company. How you manage HR can either introduce additional risk to your company or be an investment in your company that will increase its value.
Investing in your company doesn’t mean spending more than you otherwise would; it means making decisions that meet your HR needs and make your business more transferable and sustainable. Building a marketable company starts today, even if you aren’t planning to sell your business for ten years.
Case Study: Growing and Hiring
To illustrate, let’s look at an example of a decision facing many small and medium-sized businesses. You had steady growth and are at the point where you will have to hire additional employees on several fronts, including sales, finance, and IT support. In addition, you are considering acquiring a similar-sized firm in a new market.
You use cloud-based payroll software, a recruiter for critical positions, and your Controller manages your HR compliance.
Your forecast has critical challenges, including integrating the newly acquired team, the added burden of HR compliance on your Controller, recruiting the right people, and keeping your culture as you grow.
Cross That Bridge When We Get To It?
You may decide to deal with these challenges as they arise or “we’ll cross that bridge when we get to it.” You can give more work to your Controller as needed, find a recruiter who will provide you with better terms, and hope the newly acquired team integrates into your team and culture. Ultimately, this approach will have a negligible impact on the bottom line. When investors look at your historical financials, they will see more profit. Greater profitability generally means a higher valuation. It’s a win/win, right?
This approach looks at only half of the picture. It considers only the cash flow part of the equation and not the risk involved.
To a buyer or investor in your company, HR has several risks to consider, including:
Compliance issues can create ‘hidden’ liabilities.
Team culture can make or break a company.
Lack of training can weigh heavily on future growth and sustainability of expected returns.
Turnover, hiccups in hiring new talent, and inconsistent incentives are a drag on future earnings.
Poor integration of the acquired teams can hamper future growth.
You may think, ‘I am not selling my business, so these issues don’t affect me.’ Consider, instead, putting yourself in the shoes of an investor in all decisions; this will help you build a valuable business with long-term earnings potential.
Make an Investment in HR
A better option is to invest in HR. Investing in your HR infrastructure doesn’t necessarily mean you have to spend more money. It means you get the most benefit from your spending. In our case example, we want to align our recruiting, incentives, and structure with our forecast and strategic plan. What would this look like?
A well-managed HR function will align your current team, new hires, and acquired teams under one unifying umbrella that supports your company’s mission, vision, and values.
Leadership development will include training that supports and builds on this alignment. It will also line up with your forecast and strategic plan.
Recruiting management will ensure you recruit and retain the talent needed to meet your goals.
HR processes will be scalable to support both organic and acquisition-driven growth.
The compliance function will manage or eliminate risks, a key input into our value equation.
In other words, your HR function will be a solid part of your transferable, predictable, and sustainable business.
Summary
An investment in HR includes a solution that manages your human resources, payroll, compliance, learning and development, incentives, benefits, and talent acquisition to mitigate risk and increase your company’s enterprise value.
How We Can Help
Highpoint CFO provides CFO consulting services. Contact us to learn how a fractional CFO can help you with financing, forecasting, cash flow, accounting infrastructure, working capital management, by-product profitability reporting, and data analysis using business intelligence tools such as Power BI.
PuzzleHR solves the Human Resources Puzzle
We utilize our proprietary diagnostic system to customize our solution to fit your company’s specific needs. Our strategic HR service offering is not ‘one size fits all.’ We customize our service offering to fit your company’s specific needs.
PuzzleHR is a Managed Human Resources Organization dedicated to helping our clients make the most out of their investments, maximize their Human Resources, remain in compliance, and operate as efficiently as possible.
About Us
Highpoint CFO is a CFO consulting firm based in Tampa, Florida that serves clients throughout the US.
Scott Young is the President and Principal Consultant at Highpoint CFO. He is a CPA, Certified Merger & Acquisition Advisor (CM&AA), and Certified Value Growth Advisor (CVGA) with over 25 years of experience in finance and accounting at industry-leading companies.
Like most small or mid-sized businesses, you don’t need a full-time CFO. Our on-demand CFO service is the finance and accounting expertise you need to reach your business goals. We serve companies from early-stage to growing businesses through getting ready to sell. We are a fractional CFO consulting firm based in Tampa, Florida. We offer remote (virtual CFO) and in-person CFO and accounting consulting services to clients throughout the United States.
PuzzleHR is America’s premier HR as a Service provider (HRaaS). We recognize that today’s business environment is complex and that those complexities hamper business growth. We know that employers face the daunting task of combining..
Business Needs
Employee Expectations
Compliance with Government Regulations
…to Sustain and Grow Their Companies.
We have the experience and resources to help:
Keep you in compliance with government regulations no matter your location or industry
Leverage all the resources at your disposal
Make your company an Employer of Choice by helping you recruit, lead and retain the best talent available
Create Scalable internal processes to prepare for your future growth.
Let us put the pieces of the puzzle together for your business.
