The value of a company’s intangible assets can make up a substantial portion of its overall value. In some cases, as much as 80% or more of a company’s value may be directly attributable to its intangible assets. Intangible assets can be broken into four broad categories:
- Human capital
- Customer capital
- Structural capital
- Social capital
In this article, we will define human capital and explore key questions regarding the strength of your company’s human capital.
Investopedia defines human capital in the following way:
“Human capital is a measure of the economic value of an employee’s skill set. It is the recognition that not all labor is equal and that the quality of employees can be improved by investing in them.”
The quality of a company’s human capital can have a large impact on its performance and value. Many lower-middle market companies lack a strategy to effectively recruit, motivate, retain and evolve their human capital. For owners, developing a strategy to get the most out of their people by focusing on these four areas can significantly impact the bottom-line and the value of their company. We recommend that owners ask themselves the following questions about their organizations:
- Are we certain that we are and will be able to continue recruiting top talent?
- Have we recruited the right people for the right positions?
- Have we clearly defined our company’s vision, mission and values and have we shared these with our employees?
- Are we providing our employees with the right incentives and opportunities?
- Is our compensation competitive and in-line with our company’s vision, mission and values?
- Do we provide our employees with opportunities to pursue their passions?
- Do we actively mentor and train staff to manage customer relationships so that the day-to-day relationship tasks are not centralized at the top?
- Do we support our employees’ drive to advance their careers and skills?
The goal of every owner should be to build a company that can function on a day-to-day basis without their involvement. By doing so, the owner will be able to focus their energy on strategy, growth, and the “big-picture”. Additionally, a company that can function without the day-to-day involvement of the owner is easier to transfer to a potential acquirer or the next generation of owners. In many cases, this can significantly increase a company’s value. If you answered “no” to any of the questions above, it may be time to revisit your human capital strategy as your company may not be reaching its full potential.
Contact one of our succession planning advisors for more information.