October 4, 2022

Your Business Value Is All About Human Capital

How do you think about the people who work for your company? If you believe they are  valuable individuals who contribute to your success, you are on the right track. If, however, you think of them as replaceable cogs in a wheel, you may be sabotaging everything from productivity and sustainability to the value of your business.

This can be particularly impactful if you have a service business you are thinking about selling.

Think about it this way: A business’s value is a combination of its tangible and intangible assets. A company’s tangible assets are its physical assets, such as its land, buildings, equipment and physical inventory. Its intangible assets include assets that have value even though they lack physical substance. Examples include intellectual property (e.g., patents, copyrights, trademarks and trade secrets), goodwill, brand equity, workforce and more. In fact, it has been estimated that a company’s intangible assets, including human capital and culture, comprise more than half of a company’s market value on average.

Arguably, the workforce is the intangible asset that is the most volatile and difficult to value. There are a number of reasons for this, including the changing concept of what workers want from their jobs in the post-COVID-19 world. For example, employees want to understand what contributions their employer is making to society — not just the company’s profits — and they want to be part of it.

This is especially true in service businesses. In health care for instance, employees closely interact with patients who feel vulnerable and want to be treated respectfully and courteously. They also want to see staff continuity; a constantly changing staff makes them uncomfortable because it feels impersonal. Attracting the right staff is not easy.

Once businesses recognize how the quality of their staff impacts the value of their intangible assets, however, they need to step up their efforts to make their workplaces attractive to current and future employees. This means making sure wages and benefits are competitive and the workplace provides the amenities employees are seeking.

Incurring expenses for training, wellness and perks such as snacks and coffee or pizza on Fridays should not be viewed simply as an expense that is deducted from the bottom line. Instead, it is important to take a broader view: These expenses are an investment in employee satisfaction and retention that, in turn, translates to lower recruiting and training costs.

These expenses may even raise the company’s value, especially in light of the things buyers look for when it comes to employees:

  • Turnover and retention trends. Buyers may view high turnover as an element of risk.
  • Culture. What is it about your company’s culture that makes it attractive to your employees? Why are they staying at your company during the Great Resignation?
  • Training and opportunity. A company culture that values mentoring, promotes from within when possible and values cross-skills training and leadership training is viewed positively.
  • Communication. Companies that have a communication strategy, especially during times of crisis (e.g., the COVID-19 pandemic), that keeps employees in the loop are viewed with positivity.

But having company leadership that is ready and willing to making the change from a pre-COVID-19 mindset about work and the workplace to a mindset that recognizes the changes caused by the pandemic and the ensuing Great Reset takes intention and commitment.

A fresh perspective

Willis Towers Watson and the World Economic Forum recently published “Human Capital as an Asset: An Accounting Framework to Reset the Value of Talent in the New World of Work.” This report set out seven areas in which a major shift in thinking about the workforce is warranted. They are:

  1. Profit to purpose: From value to a small group of shareholders to shared value between the workforce and a broad group of shareholders.
  2. Corporate police to social responsibility: From complying with a code of conduct in the workplace to living corporate values in the community.
  3. Stand-alone to ecosystem: From the organization as a stand-alone entity to the organization as an integral part of the communities in which it operates.
  4. Employees and jobs to people, work, and skills. From matching people to fixed roles to empowering talent to focus on meaningful, nonroutine work.
  5. Workforce as an expense to workforce as an asset. From treating talent as a disposable workplace expense to valuing talent as an asset.
  6. Backward-looking financial metrics to forward-looking value metrics. From focusing on past financial performance to focusing on future potential for value creation.
  7. Quarterly to generational. From short-term view to time agnostic.

Given the current environment of an evolving workplace, a worker shortage, and the lack of trust between workers and management, companies should take this framework seriously, whether they are preparing for a business valuation prior to sale or merger or are rethinking their company for a sustainable future.

The statistics are sobering. According to a Society for Human Resource Management report commissioned in July 2019, toxic workplace cultures drove 20% of U.S. employees out of their jobs between 2014 and 2019, at a turnover cost of greater than $223 billion. And that statistic predates the pandemic and the Great Resignation.

Even small companies should realize the importance of rethinking how they view and manage their workforce.

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Hobe & Lucas Certified Public Accountants, Inc. is a full-service accounting and business consulting firm dedicated to providing clients with exceptional value.

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