FRAM SYSTEMS ^blog

Anyone involved with real estate is familiar with the concept of ‘Best and Highest Use.’ This concept simply states that no matter the condition of the buildings on a piece of property may be worth, the value of the property is based on what it would be worth if put to it’s highest and best use. The standard for determining the Highest and Best Use of a property is that the property use must be: legally allowable, physically possible, financially feasible and maximally productive. With that in mind a field that was being farmed last year and produced a net income of $4,000 and is valued at $2,000 an acre may actually be sold for $25,000 an acre if a multifamily dwelling was able to be built on it.

Now when was the last time you evaluated you business assets as to their ‘Highest and Best Use?’ Are your business assets working for you in the best way possible? What could you be doing differently with those same assets to earn a greater return from them? Unfortunately most business owners never ask those questions and are not earning the potential of their investment in their business.

You may be familiar with the tangible assets of your business. Things such as real estate, inventory and equipment. each of these must be carefully examined to discover if the money you have invested in them is returning the maximum possible. For example, if you own and maintain your building, is that building the best location for your business or do you remain there simply because you own the property? Could a better location help increase sales, lower transportation costs or taxes? Could you rent or lease your building and have a nice positive cash flow? Of course this is much simplified. The point is only can you justify, from an asset performance stand point, staying where you are now.

The same is true for your operations. Is the equipment you own be used in the most profitable way? It may be that your equipment has been fully depreciated. You may believe, many have even told me, that operating it is 100% profit. That is never the case. Cost of maintenance, cost of down time and limited capacity and technological innovations of newer equipment make actually make your older machines more of a liability than an asset. Spend some time to build your awareness of what your capital equipment is capable of and whether it really is producing.

Intangible assets such as copyrights, trademarks, patents and intellectual property may also be under performing. Often these assets are the most overlooked. Your business may own patents or other intellectual property that could be licensed to others to use. When a patent or other process is valuable, you may be able to earn substantial income from it without using any of your physical assets.

As an example, a company has developed a compressed gases recovery system for use in their plant. This unique process has saved them millions of dollars since it was first installed and refined and to protect their competition from using such a system they patented it. They believed that they were protected and cost advantage and that was the value of the patent. The VP of sales saw an opportunity since many business could benefit from the recovery of expensive specialty gases. He suggested they sell such a system. Great idea but the company was not in the gas recovery business. Instead, by licensing the technology they spent well over $2 million developing to a gas handling company based in Europe with plants on several continents, they receive a revenue stream that may soon become outstrip what they earn from their main business and which they may spin off. They are no longer concerned with protecting this from their competitors. It just doesn’t matter anymore.

So what is the most overlooked asset? The one that if you utilize to it’s fullest potential you willing have no choice but to become more profitable? Your people. Let’s face it. If you consider payroll an expense or overhead you are ignoring an amazing and profitable asset. We are accustomed to calling our employee relation part of our business ‘Human Resources.’ I don’t really agree with this name but it does hit on the fact that people are a resource. The challenge in viewing your people as an asset is that you may have considered them a necessary evil. you can’t produce your product without them yet they are expensive to maintain, are unreliable, disloyal and may even cheat steal or embezzle!

If that is your perception, look at a business model that relies almost solely on the expertise, agility and creativity of it’s people and pays them accordingly: professional sports. Look, without players there would be no sports! No basketball, baseball or puck would move. No race cars would drive. No skis would race downhill. Sports players are paid for not only the value they bring in terms of talent or natural ability, but for their ability to fill stadium seats and generate ad revenue. Moreover, they must cooperate and work together with their team members and coaches to be of any value. And for some, their personal value rivals, in terms of compensation, the earning of many medium sized businesses.

Now I know you’re saying you don’t run a sports team. That’s alright. Let’s pretend you do. Let’s say your business is a level playing field. All you competition has the same resources you do. Same building, same location, same equipment, same everything except your people. What would you do to gain a competitive advantage? I suggest that you begin building your team. Discover which of your players contribute what. Which could do more or would do more if they could. Which can play together, which are creative which are enthusiastic and which are non-producers. Just like in pro sports you have to cut the dead wood, buy sell and trade the talent and build a strong, cohesive team.

But simply having the talent is not enough. Every winning team has a winning coach. If you lack the motivational power of a Vince Lombardi, Joe Paterno or Bear Bryant, HIRE ONE. Without a leader your team, no matter how talented, will never have the focus and the drive to make your business excel.

These strategies don’t build success overnight. They are long term projects that will only pay off with perseverance. Some teams and coaches spend many seasons acquiring the talent and molding their teams to an championship level. You must have that dedication as well and be clear about your goals.

Remember, we choose our assets by how they perform. Constant evaluation is essential to maximize your return on investment. By making staying on course, finding and making the Highest and Best use of your assets, you will guide your business to the highest levels in your market.