Situation: A family-owned company has built a sustainable and modestly profitable business. They have built high quality, referenceable collaborations. The CEO is ambitious and wants to become a world-class company. They now seek limited partners as investors to grow the company. Which is more important – cash flow or value creation?

Advice from the CEOs:

• Both cash flow and value creation are important. There are several sub-questions to the question:
  • First, what is the fundamental business model?
  • Second, the CEO is the company’s charismatic leader. How best to follow his energy?
  • Finally, and most fundamentally, does the current business model make sense? Can it be simplified it to improve its scalability?
• Currently there are three divisions, each with a different objective.
  • Operations – to be sustainable.
  • Services – low profit and low percentage of company revenue but also low overhead.
  • Investment – to achieve an acceptable rate of return.
• How does the company get the best valuation?
  • Currently, the company is organized as a conglomerate.
  • Conglomerates are too diffuse and difficult to optimize to attract investors. Pure plays do better. Consider refocusing the company around its key strengths.
• The family business model is fine. The question for the family – how does the CEO keep and attract the key staff like that makes this business work? Salary alone doesn’t do it. What are the future rewards for key personnel? Consider deal participation to incentivize key employees.
• The investment and operations divisions are different companies – this is fine. Optimize both.
• To attract the best LPs, the business model should evolve from a family to corporate model. This will make more sense to investors and improve their ability to participate in future growth and profits.

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