«Companies should know how much value they are creating from year to year to make sure they are executing on their strategic plan. Knowing revenue and EBITDA is not enough. Most companies have several businesses within one company and the value of those businesses can fluctuate depending on market conditions. Also, even if you have no intention of selling you might be presented with an unsolicited offer for your company and it is helpful to know what your value is so that you can respond appropriately».
Reed Phillips
CEO at Oaklins DeSilva+Phillips
Author of ‘’QuickValue: Discover Your Value and Empower Your Business in Three Easy Steps’’ book.
«Doing a full valuation for a business is basically an essential part of the business planning process. You want to know what makes sense financially by doing a close analysis of the various pieces that will result in you stopping parts of the business that destroy value and try to do more of the activities that increase value».
Ava Seave
Principal at Quantum Media
Associate Adjunct Professor at Columbia University Graduate School of Business
Assistant Adjunct Professor at Columbia University – Graduate School of Journalism
Author of “The Curse of the Mogul” book.
Most business owners agree that making appropriate corporate decisions depends on the quality of the information available to each company.
In today’s age, companies spend thousands of Euros in data analytics and management software. However, there are only few companies that benefit and exploit the information resulting from an annual valuation of their company.
Valuing a company is a necessary process in a merger or sale but this process does not occur often, maybe once every five years.
What information and what benefits can a company derive from its Valuation process?
The benefits are multiple and below we will list five of them:
1. Operational Efficiency
A detailed assessment examines whether the company is operationally efficient, i.e. whether it can contain its operating costs. It examines the relationship between operating costs (Selling, General and Administrative costs- SGA) with sales [SGA / Sales], compares it with those of its competitors and examines its fluctuation over time. The smaller this ratio, the more efficient the company is. No company that lacks the ability to contain its costs survives in the long run.
Efficiency, efficiency, efficiency is the only way, especially if a company does not enjoy a competitive advantage.
2. Growth Strategy
Many times the ambition, not to say vanity of CEOs to increase sales, leads to fruitless expansions in areas where they don’t enjoy any competitive advantage. In most of these cases, the additional sales do not even cover the additional capital costs, be it loan or equity, necessary to fund the expansion.
A proper valuation will reveal if this is the case and may even suspend the expansion. If it is done in advance, it can also prevent this expansion. There are many companies that expanded into other industries with disastrous consequences. People need to be reminded that expansion is a strategic decision and comes with a financing cost that needs to be covered. Profitable growth comes after this cost is covered.
3. Return on Invested Capital
Traditionally most analysts base a company’s valuation on its profitability alone. In our view, this is an incomplete process.
During the valuation process, the return a company enjoys on its invested capital (Owner’s equity+ debt- cash) is examined in depth and over time. The relationship between Profits Before Interest and Taxes (EBIT) with sales (EBIT / Sales) and Invested Capital (EBIT / IC) can in the long run reveal a lot about the competitiveness of the company and the quality of management. Absolute number of profits by themselves could be misleading.
4. Dealing with Competition
A proper valuation assesses the strategic position of the company in the respective industry. The appropriate moves the company should take concerning its competitors emerge from the conclusions of this research. During this process questions such as whether the company enjoys a competitive advantage or not, and if so whether it is sustainable over time are examined and substantiated with numbers.
Based on the conclusions, the strategy concerning its competitors will be determined accordingly. Competitors are treated differently when a company enjoys a proven competitive advantage and differently if it does not.
5. Negotiation with Lenders
The official valuation of a company gives a lead in negotiating better terms of a loan. Presenting a company valuation to the banks adds to the company’s prestige and lays the foundations for the bankers to justify better financing terms. The same applies to potential investors and funds that may be interested in the company.
CONCLUSION
The knowledge of the above points leads the company to a more accurate assessment of its strategic position and it is useful to repeat the valuation process either annually or every two years. The existence of a thorough valuation is an ace up our sleeve; very useful for the growth and prosperity of the company.
If you are wondering what kind of valuation you should do, we will be happy to discuss your options with you.
Company Valuations: Fast- Effective- Economical