This whitepaper addresses why and how small and medium size businesses can significantly improve the market value of their organizations using the same methods that public companies utilize year after year.

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Beyer Management Consulting, Inc.
Strategy, Business Modeling & Tactics
The Case for Value Based Management for Small to Medium Sized Enterprises
By
Thomas M. Beyer
(This whitepaper addresses why and how small and medium size businesses can significantly improve the
market value of their organizations using the same methods that public companies utilize year after year.)
Why are valuations higher for Large Companies (LC’s) versus small and medium size companies (SME)? Why
do LC’s seemingly have access to unlimited amounts of liquidity that give rise to new and powerful
opportunities? Is it even possible for owners/managers of SME’s able to significantly improve the value of
their enterprises while effectively competing with the big boys? The answer to these questions may be found
in the valuation based focus of the management to of LC’s versus the cash flow focus and profits focus of most
SME’s.
2 Guiding Principles VBM
1.) Investments must yield a higher return than the cost of capital (and cost of equity- CAPM)
2.) All management decisions have to lead to higher returns than the cost of capital considering the
lifecycle of the decision
VBM leads to enhanced allocation of capital, long-term strategically focused management and decision
making processes consistent with the economic goals of the company.
Internal Results
Application of VBM results in performance measurement and incentive systems that determine the
responsibilities within the organization structure and defining the reporting processes.

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External Results
All enterprises regardless of size compete for the scarce resources of capital. Most SMEs do not have access
to organized capital markets as they do not fulfill the requirements
Of modern capital market instruments concerning profitability. The ability to raise external equity usually
depends on the expected value gain of the external investors. Owner-managers of SMEs also have other
objectives besides economic growth and profitability (such as self-actualization or social commitment), which
often discourages external investors. SMEs often exemplify an extreme degree of control aversion to the sale
of equity to outsiders. For most SMEs retained earnings are the main source for new equity.
The equity-deficit of many SMEs results in an increased demand for debt. SME financing thereby is
substantially affected by the relationship banking, which is primarily based on a traditionally grown long-term
relationship with the respective house bank.
Equity Ratio
The importance of the equity ratio as an indicator for the security of a credit is easily comprehensible by
keeping in mind the fact, that many SMEs are short of assets, which can be used as collateral. Therefore, it
seems to be more than plausible that SMEs should focus their corporate management on strengthening the
long-term equity base and thus should implement value based instruments.
Annual Cash Flow
This ratio is one of the central determinants of the shareholder value, which is traditionally calculated as the
sum of the discounted free cash flows and determines the amount which could be distributed to the
shareholders. The cash flow also shows a company’s ability to meet its payment obligations (and thus its
credit obligations) in future.
For this reason an increasing cash flow leads to a better rating grade and thus has a direct and an indirect
effect on the shareholder value calculated by the Capital value method. The shareholder value is on the one
hand directly influenced by the ascended cash flow, which is the denominator of the calculation formula of the
shareholder value. It is on the other hand indirectly influenced by the shrinking discount rate caused by the
reduced costs of capital as a result of the improved rating grade.
Result
The increased cash flow and the decreased cost of debt will result in an increasing shareholder value, because
of the reduced capital cost rates used in profit concepts in the capital value-method.

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Direct and Indirect Effects of Value Based Management
Value Based Management
Implementing value based principles
helps meeting the rating
requirements and therefore getting a
better rating grade (e.g. increased
equity ratios and cash flows and
improved decisionmaking.)
Direct Effect- Increasing cash flow
leads to ascending shareholder value
Indirect Effects- A better rating grade
leads to reduced costs of capital and
therefore to an increased shareholder
value.

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Globalization- the accelerated case for SME’s to apply VBM
Globalization, internationalization, and widespread structural changes across economies are aspects that
affect more and more SMEs. These developments cause enormous challenges for SMEs in order to survive or
even develop their business. Integrating value based principles in their corporate management generally helps
to identify the chances but also the risks resulting from the increasing dynamic environment and helps to stay
competitive in the long run in global markets.
It’s in Every Owner’s Best Interest to Implement VBM
1.) Owner-Managers- Important to closely monitor and manage economic risk of the business as this
effects them personally.
a. VBM- eliminates and/or minimizes solvency risk associated with the owner’s personal financial
profile.
2.) Long-term Existence of the Enterprise- Manager in public companies views the entity in perpetuity and
makes decisions accordingly.
a. Owners- after reaching a personal income/success level tend to focus on self-actualization. The
less importance place on the longevity of the enterprise (succession planning).
b. This makes the company less competitive over time (Life Style Companies)
c. 3 Options for the company
i. Intra-Family Succession
ii. External succession (MBO/MBI)
iii. Separate possession and management (All/Majority Sale)
3.) Improved competitiveness and advantage over larger/public competition.
a. E.g. - the never ending debate between the need for job security versus customer service.
4.) VBM is the basis for analyzing strategic options and help assess the profits and return associated with
each strategy.
Why have SME’s traditionally not focused on VBM?
1.) Cost of Valuation Services
2.) Lack of academic background
3.) The short-term maximization of stock price (value) is not compatible to the personal aspiration of the
owner-manager. This includes social relationships within the business community, suppliers, vendors,
clients, etc.
4.) Limited reporting resources and technical skills
5.) Lack of internal objections to decision making (self-fulfilling circle)

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VBM evaluation instruments SME’s
Absent public markets a regular independent valuation is required.
1.) Valuations- regular intervals
2.) Focus on Bank based/capital providers orientation (ratios that effect the cost of capital)
3.) Focus on financial reporting
Conclusions
Large public and Venture Funded enterprises compete at a higher level because the cultures of these entities
are continuously focused on VBM. In the past the SME has been limited by time, capital, and human resource
to effectively apply the principles of VBM thus relegating the SME to a lower tier of competitive evolution
leaving technology gains as the primary source of value improvement. This is further exacerbated by the
owner-manager’s tendency to focus on personal growth and self actualization after attain a personally
preferred level of economic freedom.
However with availability of reasonable priced valuation services, streamlined and expert accounting and
financial reporting systems, and marketing technology- owner-managers of SME’s can now enjoy the financial
and competitive benefits of driving a value based culture that will deliver unparallel long term value.