As an owner, most investors look at a combination of the following. Which are important to you, and are you applying them?
1. Running a profit & loss
One of the primary goals of any investment is to generate dividends and, ideally, build a passive income stream. When evaluating the CEO or MD, it's essential to assess their financial track record. They should have proven capability, preferably as leaders who have successfully managed companies to generate consistent returns, whether salary, dividends or other. Their ability to grow a profit and loss (P&L) at both current and target levels is critical.
2. Weaknesses
Great CEOs and MDs often possess single-function expertise, but it's essential to be aware of their weaknesses as well. A leader may excel in one area, such as operations, but may be weak in others, like sales or finance. How are they covering their weaknesses?
3. Spending and Reporting
Consider how the CEO or MD manages capital allocation as well as day-to-day buying. Are they responsible with company funds, or do they make unnecessary expenditures? Additionally, transparency in decision-making, actions, and performance is vital. Do they provide clear reports to keep owners informed?
4. Vision, Strategy, and USPs
Evaluate the CEO or MD's clarity of vision, strategy, and Unique Selling Propositions (USPs) for the company. What do others say about their vision and strategy? Ensure their plans are well-defined and communicated to drive the company forward effectively.
5. Cash
Cash management is a make-or-break aspect of any business. Poor cash management is the commonest cause of business failure; many rapidly expanding as well as failing firms can tell you that. Assess the CEO or MD's maturity in cash management to minimize this risk.
6. People Competence
A CEO or MD's ability to positively influence and manage the team is crucial for a company's growth. Consider whether their leadership style can handle the growth you expect without limitations. Many have difficulty delegating at all, let alone senior tasks. Proven management of staff, managers and directors is reassuring.
7. Performance-Based Compensation
Incentivizing CEOs and MDs with performance-based compensation is a great way to align their interests with shareholders. A liveable income with significant benefits may motivate them to drive the company's growth and increase its valuation.
8. Ethical Considerations
Alongside financial drivers, consider your ethical and social drivers in their decision-making process. Personal character and compliance with Social Return on Investment (SRoI) should align with your investment values.
9. Risk Management and Diversification
Don't ignore industry trends, such as sustainability and diversity. Assess the CEO or MD's ability to adapt to changing markets and mitigate risks. Diversification, liquidity, and tax planning should also be part of your investment strategy; how does the business help you with this?
10. Seek Professional Advice
If you're unsure about either your investments or your business management, get advice. That’s an IFA for the former or a trusted business advisor/coach for the latter.
Conclusion: Even if you are a great manager, don’t forget you, the owner.
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