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.

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.

– 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.

Interview on the legal perspective of business issues.

This article is an interview I conducted with Jeffrey Paulsen, Principal of

Paulsen Law Firm PLLC, Bloomfield Hills, Michigan. It is presented as a series of articles to be presented in this forum.

We touched on just a few different issues and perhaps in the future Jeff will agree to visit again. Here is another part of the discussion:

Gerry: the impact of the economic downturn is well known and employment in both countries has been dramatically affected. Major industries have been forced to retrench in order to survive and in some cases without government handouts would close. Do you see similar impact on professional practices? How has the economy impacted the legal profession?

Jeff: Gerry, thank you for this question.  Without a doubt, the latest economic downturn has had an enormous short term economic and likely long term structural impact on the legal profession.  Many law firms are based upon an out-dated business model that consists of high overhead costs, high hourly billing rates, minimum billable hour requirements, and incentives and a culture based upon revenue generation as opposed to client-centric services.  Because of the high cost overhead structure of offices, high paid associates and staff, sports and country club perks, when the economy and tight credit conditions prohibited many companies from growth oriented activities and into a survival mode, the business generation and revenue stream of many law firms were severely impacted.  In order to save the law firms, lawyers and staff were laid off in record numbers.  Today, there are many unemployed or underemployed lawyers and unfortunately many of these lawyers never considered being an entrepreneur and were never given training on how to be an entrepreneur.  Just like the large automotive companies, the large law firms consisted of highly educated and well qualified individuals that no longer had the entrepreneurial spirit that built both industries.  Personally, I believe the legal industry has changed forever.  Coupling business leaders concerns for cost control, with an understanding that there are well qualified and very experienced lawyers that can provide the same services as their traditional business model law firms, but at a fraction of the cost because of lower overhead structures; the lack of minimum billable hour requirements and the real willingness to look for Win-Win creative compensation relationships with clients; and a belief that a lawyer can put the interests of their clients first and still make a nice living; leads me to the conclusion that the old out-dated traditional legal business model is on its way out.  While there will continue to be a need for the large behemoth law firms with multiple offices (i.e. very high cost overhead structures) for certain legal matters, the bulk of the legal needs and legal opportunities will exist for lawyers that believe that it is time for the legal industry to get aligned with business reality.

Thanks, Jeff for your participation. I’m sure the readers will enjoy your insights and I look forward to a future visit with you.  Gerry, my pleasure and it is great to have reconnected with you after all these years.  While my insights are personal, I have had the opportunity to think about and be involved in the legal industry for over 25 years as an in house corporate lawyer, a large law firm partner, and now a small law firm entrepreneur.  It is an exciting time for businesses in both Canada and the U.S., and for the legal industry.  I believe the best opportunities are yet to come.

Interview on the legal perspective of business issues.

This article is an interview I conducted with Jeffrey Paulsen, Principal of

Paulsen Law Firm PLLC, Bloomfield Hills, Michigan. It is presented as a series of articles to be presented in this forum.

We touched on just a few different issues and perhaps in the future Jeff will agree to visit again. Here is another part of the discussion:

Gerry: I often see business leaders shun taking advice from lawyers even when the advice is clearly in their best interest. How do you approach overcoming an issue like this? It must be difficult to be viewed as the “sales prevention” department within your own company or by the client.

Jeff: Yes, you have identified a problem that many lawyers face.  Just like the human resources function, the legal function is seen as a “cost center” that does not generate revenue (although I will argue that often the future revenue generated or expenses avoided are because of good lawyering) and therefore the lawyers are not held in as high regard as those business line leaders responsible for P&L statements.  My own view is that a great business leader understands that success comes from a well balanced team of professionals who are given the opportunities to do what they do best; whether it is accounting, finance, marketing, sales and yes, legal.  My approach has been to demonstrate that I am a business executive with a law degree and although my first responsibilities are to handle the legal functions for a company, my advice and counsel may be considered as a member of the senior management business team as important for the overall business strategy and business plan.  If I am permitted to express my views, from both a legal and business perspective, in conjunction with other senior team members, then I will have given the business leaders with the advice that they can use to make the ultimate decision that is in the best overall interests of the company.

Interview on the legal perspective of business issues.

This article is an interview I conducted with Jeffrey Paulsen, Principal of

Paulsen Law Firm PLLC, Bloomfield Hills, Michigan. It is presented as a series of articles to be presented in this forum.

We touched on just a few different issues and perhaps in the future Jeff will agree to visit again. Here is another part of the discussion:

Gerry: Another common problem I see is how companies deal with customer complaints. Consumers in both countries seem to be too litigious and think companies have such deep pockets they can sue over every product defect and get a large settlement. The old “I’ve got a bug in my soup” story. If the company settles all the time they are vulnerable to copycat suits. If they defend aggressively they get a PR black eye. How do you advise companies in these scenarios?

Jeff: My answer will not to be one answer that fits all.  Having served as a company General Counsel responsible for protecting the company from litigation and working to avoid litigation when possible, I can share a few of my suggestions.  My initial premise is that we business lawyers should be in the business of helping companies avoid litigation if at all possible.  Litigation is expensive, time consuming, gives up control of the resolution process, and takes the company’s focus off of its real business; making products, providing services and helping others achieve commercial success.  Although I am now an outside lawyer, I still think it is almost always in my clients best interests to attempt to resolve customer complaints and disputes through creative business solutions, or if needed, by monetary settlements. The counter to that suggestion is as you have noted that it may encourage copycat complaints and lawsuits. There are times when a company needs to defend its legal position aggressively.  Clearly if you have a dispute that can jeopardize the existence of your company, its business, a product line, or if the ability to construct a business resolution is not possible, then you must devote whatever resources are needed to ensure success in the litigation.  When it comes to copycat litigation, I suggest that a clear understanding of the risk be discussed and that a plan for resolution be implemented.  I attempted this at a former employer with retail establishments where we received over 2,000 customer complaints per year and typically had 40 to 50 cases in litigation at any one time.  Although the implementation of our plan was not exactly as I had envisioned, this type of decision-tree process can help when a company considers whether to defend each and every lawsuit, settle each and every lawsuit, or preferably implement a plan that includes both a litigation and settlement strategy.

Interview on the legal perspective of business issues.

This article is an interview I conducted with Jeffrey Paulsen, Principal of

Paulsen Law Firm PLLC, Bloomfield Hills, Michigan. It is presented as a series of articles to be presented in this forum.

We touched on just a few different issues and perhaps in the future Jeff will agree to visit again. Here is another part of the discussion:

Gerry: Another common problem I see is how companies deal with customer complaints. Consumers in both countries seem to be too litigious and think companies have such deep pockets they can sue over every product defect and get a large settlement. The old “I’ve got a bug in my soup” story. If the company settles all the time they are vulnerable to copycat suits. If they defend aggressively they get a PR black eye. How do you advise companies in these scenarios?

Jeff: My answer will not to be one answer that fits all.  Having served as a company General Counsel responsible for protecting the company from litigation and working to avoid litigation when possible, I can share a few of my suggestions.  My initial premise is that we business lawyers should be in the business of helping companies avoid litigation if at all possible.  Litigation is expensive, time consuming, gives up control of the resolution process, and takes the company’s focus off of its real business; making products, providing services and helping others achieve commercial success.  Although I am now an outside lawyer, I still think it is almost always in my clients best interests to attempt to resolve customer complaints and disputes through creative business solutions, or if needed, by monetary settlements. The counter to that suggestion is as you have noted that it may encourage copycat complaints and lawsuits. There are times when a company needs to defend its legal position aggressively.  Clearly if you have a dispute that can jeopardize the existence of your company, its business, a product line, or if the ability to construct a business resolution is not possible, then you must devote whatever resources are needed to ensure success in the litigation.  When it comes to copycat litigation, I suggest that a clear understanding of the risk be discussed and that a plan for resolution be implemented.  I attempted this at a former employer with retail establishments where we received over 2,000 customer complaints per year and typically had 40 to 50 cases in litigation at any one time.  Although the implementation of our plan was not exactly as I had envisioned, this type of decision-tree process can help when a company