True Company Value

Owners and stakeholders want good value for their investment when the business is sold.  Value, however, in the transaction means different things to each party.  To those who have an equity position it means a big check – hopefully! To the buying person or group it expresses the level of certainty in the return on investment in buying the business.

Owners may dream about how big a payday they will enjoy upon the sale of the business.  The buyer, on the other hand, itemizes the list of business characteristics that will give the buyer confidence of a reasonable return by investing a substantial amount of money necessary to be just the winning bid and cause the owner(s) to sell which represents the true value of the company.

Business characteristics that buyers test for value may include intellectual property, capital equipment, facility locations, staff depth of experience and capability, mature business and industrial processes, IT sophistication, customer experience, brand, business planning and strategic position in the market.

Revenue growth, earnings and cash flow and a solid balance sheet are also key financial measures that will affect value. They are used in many valuations and are useful but they tend to reflect historical performance and do not necessarily measure the health of the business going forward.

Key question to ask is.

“How well is the business prepared to: 

  • Deal with the unexpected
  • Proactively manage to growth objectives
  • Sustain or improve historical performance?”

Can a business pay a good return to the current owners and not necessarily be a great value to a buyer? Yes!  Many businesses provide a good salary and standard of living to the current owners but the business may not be in great shape. The key question is whether they owners have an inflated view of the value of the company.

It is in the best interest of an owner when considering the sale of the company to focus on those characteristics of the business that will influence the true value of the company. It may require a three to five year horizon in order to address major systemic business shortcomings that would depreciate a premium value if left unattended.

Examples:
Another issue is evidence of aging business practices that are comfortable for the current owners but do not integrate well with the practices or systems of the prospective owner.  These practices were successful and valuable in their time but a prospective owner will see them as a negative needing to be changed immediately in order to integrate successfully which involves additional investment and risk.

1. A primary oversight of many owners is their role in the organization and integration in the conduct of daily operations.  A buyer will significantly reduce the value of the company when an owner has a major impact on the business, as the likely hood of the owner staying on in a productive position is unlikely.
Consequently a major force in the success of the business has to be replaced from the beginning, which raises the risk that the business might not perform as well for some period of time.  The major risk in this situation is retaining customer relationships that the owner had cultivated and nurtured personally but never delegated to a qualified subordinate.
2. An owner who has not successfully withdrawn to the corner office and delegated major business functions to others indicates there has not been an investment in developing middle management and a sign that the organization in under developed.  Key players in the organization are not responsible for or used to major decision-making since the owner has kept that to himself or herself.  This practice has either discouraged talented people joining the organization or staying with it over time.
3. Another issue is evidence of aging business practices that are comfortable for the current owners but do not integrate well with the practices or systems of the prospective owner. These practices were successful and valuable in their time but a prospective owner will see them as a negative needing to be changed immediately in order to integrate successfully which involves additional investment and risk.

Remedy:
A wise owner will engage an outside party to determine how prepared the company (owner included) is to get the best and true value for the company.  Course of action may include:

  • If the owner is too involved then a development plan needs to be put in place to promote or recruit one or more mangers with the talent and desire for executive responsibility and groom them to take over the range of responsibilities tightly held by the owner.
  • Where business practices are under developed upgrade systems and design business processes that fit the current business conditions.
  • Establish an annual business planning process that involves the leadership team, defines responsibility and accountability where goals and objectives are reviewed on a quarterly basis.
  • Sample customer satisfaction and address short comings and align company resources to improve customer experience in a timely manner.

Summary
At the end of the day it is critical that the true value of the company be an expression of what will most excite a buyer and not just the owner.  An owner who understands this will deal with the true value of the business and not an unrealistic dream.

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