DETERMINING THE VALUE OF YOUR COMPANY (PART 4)
Unlocking new value for your company
A CFO who understands what their company is worth has a clear advantage when it comes to improving the business and its value.
Reed Phillips, Managing Partner, Oaklins DeSilva+Phillips, New York
Charles Slack, business and financial writer
We believe the single most important piece of information a CFO can have about their business is its current value. Those who understand what the company is worth, and why, have a clear advantage over competitors when it comes to unlocking new value moving forward. And we believe that conducting valuations internally is not just simpler and less expensive than using third-party experts, but will give you and your team a deeper knowledge of your company.
If you’ve followed along with the previous articles in this series, you’ll know we’re almost there. Using our QuickValue approach to valuation, in part 2 we discussed how to identify and rate value drivers, a company’s unique characteristics that can make two outwardly similar companies quite different in terms of value. We also discussed how to identify and rate your most appropriate eight to 12 drivers to determine your company’s Value Driver Score. After that, we showed you how to find the range of multiples for your industry.
Now, we’re ready for the payoff, bringing it all together. Let’s use the example of the hypothetical market research company we introduced in part 2, whose deep dive into its value drivers produced a Value Driver Score of 66%. Let’s say that same company determined an EBITDA range for its industry of 10.3x on the low end to 17.6x on the high end (from part 3). Based on that range, the 66% Value Driver Score corresponds to an EBITDA multiple of 15.1x, as shown below.
If the market research company has US$10 million in EBITDA, determining its value requires a simple calculation:
US$10 million x 15.1 = US$151 million
Using this information
Once you’ve established the value of your company, you are ready to unlock even greater value by putting the new knowledge you have acquired to work. Not only do you have a defensible valuation, but also a deeper and richer understanding of what makes your company valuable and, more importantly, areas you might improve to further increase your valuation.
If your QuickValue results were lower than you hoped, that’s disappointing, but in the long run not necessarily a bad thing. Low scores flag opportunities you might not otherwise see, allowing you to improve the business and its value.
Here are four ways companies can use the results of QuickValue to hone their business strategy:
- Respond decisively to an offer. If a buyer approaches the company with an offer, you can quickly compare their offer with the value you calculated. Low offers may be dismissed out of hand or answered with counter offers. Attractive offers, at or above your valuation, might be considered.
- Compare value creation from one year to the next. Measure improvements in value from one year to the next, with the current year as the baseline. This allows you to track your progress in creating value.
- Guide your growth strategy. Prioritize where to invest or divest, and use your Value Driver Score to set strategic goals. QuickValue provides the clarity you need to choose strategies that deliver the most value, not the ones that are easiest to execute.
- Set incentives for your team. Rewarding key staff for value creation aligns them with owners and shareholders more than using incentives based on revenue or EBITDA increases. That’s because growth in revenue and EBITDA do not always lead to valuation increases, particularly in volatile industries where multiples move up and down frequently.
CFOs who find ways to unlock new value for their companies are highly desirable. Creating a valuation of your business each year opens the door to being a visionary who can better anticipate the future and plan accordingly.
In the next and final installment in this series, we’ll explore ways of using your QuickValue results as a central part of your strategic plan.
More about Reed Phillips and Charles Slack, and their book ‘QuickValue’
Reed Phillips is CEO of mid-market M&A firm Oaklins DeSilva+Phillips, and Charles Slack is a business and financial writer. They are the co-authors of the book, ‘QuickValue: Discover Your Value and Empower Your Business in Three Easy Steps.’ Tables in this article originally appeared in ‘QuickValue’.
More about this six-part series on ‘Determining the value of your company’
This is the fourth article in a six-part series written for CFO.com about how CFOs can lead an internal team in determining their company’s value. The other articles in the series are:
Part 1: Are you your company’s chief value creation officer?
Part 2: How well do you understand your company’s value drivers?
Part 3: Finding the multiples essential to determining your company’s value
Part 4: Unlocking new value for your company
Part 5: Putting value at the center of your strategic planning
Part 6: Q&A with Reed Phillips and Charles Slack