Monday, March 14, 2011

Business Value

Do you know what the business is worth?
Corporate valuation is not a perfect science.  Indeed, value is perception.  Nevertheless, valuation exercises are done with the objective of maximizing the growth of shareholder wealth. 

One of the benefits of corporate valuation exercises is to determine how best to raise capital.  The best financial solution is one that minimizes the cost of capital or increases the value of equity.  By conducting valuation exercises, you would be better able to provide clients with advice on capital and business structures and, of course, provide the ensuing financial structure for expansion purposes, mergers, acquisitions, divestitures and restructuring.  For private companies, valuation exercises are also important for estate and tax planning.

While a valuation exercise may help in determining what the best financial strategy to adopt is, it will only give an indication of what the value of the company is given the economic, financial and market conditions at that point in time.  For a publicly traded company, the value of equity is also dependent on several factors, including but not limited to, the liquidity of the stock, the control structure and who the target buyer is.  For a private company, other factors will include family employment, additional benefits, the control over the bonus and dividend policy and the mix of asset ownership. 

There are several valuation methods.  Asset valuation is a good starting point beginning with book value and then moving on to replacement value, market value and liquidation value.  Assessing the market value of the company as a whole requires access to market data bases whereby a complete comparison of similar companies is done through ratio analysis and industry rules of thumb.  The most straight forward, effective and efficient method is the Discounted Cash Flow (DCF) method whereby the present value of future cash flows is calculated.

The DCF method uncovers the intrinsic value of companies, particularly in the case of highly cyclical situations, avoids the issues of interest rate environment because the rates used in the model are long term rates, and provides a risk adjusted appraisal as it uses expected rates of return.  In short, it is a sound quantitative method on which to base discussions around financial strategic planning.

The bottom line… know your bottom line and what your business is worth. Fiscal planning will be a lot stronger.

Tuesday, March 8, 2011

When is the right time to go?

One of the more interesting and challenging questions I run into when providing consulting support is “when should I be thinking about exiting this business? There are many factors to be considered but here are a few thoughts.
What kind of shape is the business in today? Is the business operated from strong principles of strategy with a clear vision? Can that vision be expressed and understood by those who manage the business or potential buyers? If you the owner cannot clearly state the purpose or reasons that you exist don’t expect new owners to invent it for you.
How will you get the maximum return if you plan to sell? In cases where management/ownership is dominated by a single individual it is important to maintain a high degree of confidentiality so that employees do not become insecure and unsure of the stability of the company or their jobs. This instability can easily be communicated to a potential new buyer and create a poor impression.
Factors that may support your decision to leave can grow out of many conditions. The most common is an age derivative. A long career leading to a desire for more personal time; reap the rewards of your career. Age may not be the prime driver but longevity at the job could be creating burn out. Time to move on.
Another good time chosen is driven by a need for change. You may feel you have achieved all that can be achieved and you wish to quit while on top of the game. This may also provide a high rate of return if the business is at a high level of performance. Selling now may produce the equity needed to finance a new opportunity.
Look for opportunities to exit from positions of strength. A well trained and competent management group may provide the opportunity to offer your staff a management buyout.  Managers may be able to pool resources to fund the buyout, you as owner may offer to finance all or part of the buyout or there may be an option to use company assets to finance the loans needed for the buyout. This is often referred to as a LMBO – Leveraged Management Buy Out. It also provides good opportunities for maintaining stability in the organization.
Finally, the marketplace may facilitate determining the right time to exit. Poor economic conditions or competitive activity can have a huge impact on if or when you should exit. Positive conditions too might bring a competitor to the door with a buyout offer.
So the options are many but not always easy to sort through. Timing is critical, business life changes,  choose wisely.

Tuesday, March 1, 2011

– Are you stuck in a pressure cooker?

In need of tips to reduce the stress you are under?
You may want to consider some of the following options in order to lessen the impact or negative effects may have on your business operations:
-        Know your body signals; excessive heart rates, headaches, anxiety may be signals and suggest a need to find time to wind down.
-        Don’t procrastinate and postpone decision making. Difficult decisions are not made easier because you postpone them. At times conditions may worsen if issues are not resolved.
-        Without really ducking a decision, stress can be relieved if you just take a short break or switch tasks for change of perspective.
-        Stay fit. A program of regular exercise can help your body and mind deal with difficult situations that may arise from time to time. Try to maintain a healthy diet to support your overall health.
-        Achieve balance between work and other family and personal activities. Enjoy time away from the job to let you recharge your batteries. Plan periodic vacations or days off. The organization is unlikely to collapse because the boss is away for a short time.
-        Delegate responsibility. No one has a monopoly on all of the good ideas and ways to resolve problems. Let staff participate as part of team that enjoys successes and faces difficulties on the job as well.
-        Use networks within and outside of the business to share ideas and issues with. Trust people to help with business issues. Working in isolation is rarely a good idea.
-        It’s nice to want and demand high standards but an obsession with perfection can destroy a business and the people that surround you.
-        Make sure key support people including those managing the  finances keep you up to date. Since cash flow is a key marker make sure expenses are kept under control and systems to improve productivity are reviewed often. A well run business with good information flow is a key to stress reduction. Eliminate surprises.

These suggestions won’t eliminate all of the stress in your business but I find they help keep stress at a manageable level.