I recently attended and presented at the 2017 Company Valuations Conference in Auckland. Other presenters consisted of valuation experts with their own consulting firms, law firms, business broking firms, accounting firms, Intellectual Property experts and even a speaker on the psychology of cognitive bias. During the conference I connected with some impressive minds, who are experts because they have a collection of skills including technical, but more importantly the ability to be practical and logical and to understand business.
“Congratulations on an excellent presentation
on a difficult topic.” Clyth MacLeod
I was allocated the topic of calculating capitalisation rates and achieving an active measure for mid-market businesses in NZ. The valuation of $5m to $50m revenue unlisted companies is challenging as there is no real data available and is dependent on making defendable assumptions. In the previous 24 months, I had the opportunity to provide opinions on three companies in the revenue range of $10m to $100m, which had resulted in a transaction at within 10% of my opinion. I was able to refer to these examples (altered numbers and limited disclosure) to present methodologies used in a real life context which was very useful.
So what did I present, and what did I learn? I could go into all the technical details but that would most likely bore most of you, and would not stick in your minds. I think what would be most useful is to share some of the themes that ran through almost every presentation taking out all the jargon, reference to legislation, reference to cases, and all the fancy formulas. To me, these are integral to valuation and therefore integral to creating value in business. These are as follows:
What exactly is the business that is being valued?
An example of this consideration is say a car-yard that offers finance to customers. It could be the case if most of your vehicles are sold on finance, commissions and other income from finance could be a large portion of your turnover. In this case, is part of your business actually a finance broking business? Another example is a retailer that has recently converted all or part of their business to online retail and subleased some of their premises. It could be that the lease income is now a significant portion of their income, so is a significant part of your business property leasing? How much of your income and expenses relate to each activity?
Know the business honestly and objectively
Perform analysis that identifies internal strengths and weaknesses, internal and external risks and where there is growth or opportunity potential. Some simple examples are customer concentration risk, supply constraints, new technology, key person risk, existence of other capacity constraints or cost pressures. What is your pricing strategy and has is recently been reviewed? Can you identify how much value or even income specific products / services add to your business? What will the business look like post a potential transaction? Would there skills that will be missing? Would there a material change in available resource or supply terms that is vested in current ownership? What would a potential buyer pay for? It is also essential to identify the market the business operates within and around and the risks and opportunities this presents.
What is the context of the valuation?
Is it a sale of business assets, a sale of shares, or a sale of a parcel of shares? Each of these has separate considerations on value and on risk, and on any premium or discounts. Standards of value must be considered as to whether it is fair market value, or fair value. Neither of these terms are specifically defined in NZ, therefore valuation context is very important.
In terms of your business, what is the ownership structure and the risks to this? What are all the owners’ motivations and exit / succession strategies? Has all of this been taken into account as much as possible in a shareholders agreement? Is there a standard of value (either fair market value or fair value) included for share parcel transactions?
What does all this mean for you?
If you have a business, and regardless of whether you need a valuation for any purpose, there are lessons to be learned from the above. Knowing your business and the market in which it operates and tailoring your decisions and strategies around this will help drive value. Do you have shareholders agreements in place that state how share transactions will occur? The business environment is evolving at a faster rate than it has ever done in the past. How has your business changed and evolved? When was the last time you analysed your business and the market it operates in and around? It is increasingly more important to work on your business and identify what barriers/weaknesses/risks exist in growing or maintaining value, and what strengths and opportunities can be exploited in doing so.
There is a lot to be learned from valuation concepts on how to maintain or grow value in your business. I urge you to be proactive with your businesses and review and analyse on at least an annual basis. If you need help in this review and analysis – we are here to help.