Increase the Value of Your Business
Corporate governance has all the benefits of personal hygiene: it keeps your business healthy and makes it more attractive. And if you don’t keep up regularly, your business will end up looking shabby.
The concept of corporate governance refers to high level “outside of day-to-day” strategic investments to ensure the good health of a business. Ongoing business maintenance is important whether or not the business has outside investors or is preparing for a sale. A presentable business meets certain standards including:
Current and accessible corporate formation documents
Comprehensive and clean financial and tax reporting
A robust balance sheet
A well-considered financial forecast
Comprehensive risk management
These are the sorts of things that companies with outside boards maintain and communicate at least annually.
Just like personal hygiene, corporate hygiene requires small, regular investments. The best way to prevent a cavity is to floss every day for 30 seconds. But like the patient who waits to begin a furious flossing regimen until the week before their dentist appointment, many owners wait until they need to or want to sell the business before making the business presentable.
For companies without outside boards or investors, one of the easiest ways to approach corporate governance is to commission an independent valuation of your business every two-to-four years. If done regularly and intentionally, the valuation process can be a catalyst to find and resolve problems. Minor, painless adjustments can create better cash flow while you own your business and a higher multiple when you sell.
Outside business valuation is key to good corporate governance
A sound business will not only create annual earnings for shareholders, but also create long-term capital gains as the value of the business grows. Most owners are curious about the value of their ownership stake, and likely have some expectation of monetizing or transferring their ownership at some point. In my experience as a valuation expert, here are the benefits owners enjoy when their company commissions an independent valuation every two-to-four years.
Create consensus: a quality valuation will either confirm instincts regarding business value or illuminate blind spots. If the latter occurs, the valuation will quantify weaknesses. The owners can get ahead of conflicts arising from unmet expectations. Bickering ownership groups make unforced errors. Conversely, owners with aligned expectations for expected cash flow and potential sale value will make smarter decisions about reinvesting in the business vs. harvesting profit.
Identify opportunities: A valuation expert will conduct a comprehensive financial analysis to assess the quality of earnings. This analysis often results in a list of options to make your business worth more. It will point out unusual expenses (like corporate jet skis) and non-market compensation (anyone making too much or too little). It will also evaluate credit and operating ratios to determine the overall health and stability of the business. Making conscious operating decisions increases both the odds of attractive cash flow for yourself and the business’ attractiveness to a potential buyer.
Identify risks: a valuation produces an independent analysis of the risks to your business that hurt value. Once you understand these risks—like over-reliance on either a concentrated customer base or key employees—you can take steps to address and improve business value. These changes often have the added benefit of making your business easier to run while you own it.
Control your destiny: a quality valuation forces owners to look beyond what is in front of them. To do the exercise well, you must project cash flow 3-5 years out and think hard about where you are steering your business. This exercise reveals which variables have the most influence on the money in your pocket and the value of your business.
Out position the competition: a valuation includes an unbiased, third-party perspective on how your business stacks up to the competition in the eyes of a buyer. The best valuation experts can access benchmarking data beyond what is publicly available. Savvy business owners can use this information to outmaneuver the competition so that they are the most attractive option to a strategic buyer willing to pay top dollar for top quality.
Avoid unnecessary pain: lack of consensus among owners on the value of a business increases the odds of a pain when one or more owners wants to or needs to exit. And in the world of business transactions, pain is measured in dollars. In my experience, a contested transaction requires multiple appraisers ($50K+) and hordes of lawyers (another $50K+). Contested processes often result in wide variations between valuation positions, and strained relationships.
Sound corporate governance does not happen overnight! But owners who make a modest, regular investment of time and money can expect a more profitable, manageable business.
Do you need a plan to improve your corporate hygiene? Let’s talk!
Liza BowersoxFounder and Managing Director(804) 482-0689liza@artemisvaluation.com