Five Steps for Business Owners to Practice Good Corporate Governance
My favorite (and oftentimes most successful) clients don’t just ask me “how much is my business worth?” Instead, they ask, “how can I make my business worth more?”
They already know the obvious answers like growing revenue and cash flow. So my advice focuses on improving the marketability of the business through good corporate governance. By this I mean strategically investing in operations to make the business more attractive to a potential buyer.
Usually, my first step is to explain the benefits of good corporate governance and the risks of bad corporate governance. I have written before about how good corporate governance increases the value of your business and how bad corporate governance makes ownership transitions unnecessarily painful. Companies with outside investors or independent boards generally don’t have issues with this, but the vast majority of US businesses are very closely held, sometimes with a single owner or family group.
Once my clients understand the benefits of good corporate governance, their next question is, “what is the next best step?” While the answer to this question is different for every business there are some basic principles every business owner should know.
Do I need to do this right away?
If there is any likelihood of a change in equity or debt capitalization (a balance sheet event), there is no time to waste in implementing good corporate governance. Some examples of balance sheet events include:
Expected sale of the business in the next 5 years
Plans to issue equity to key employees
Redemption of minority equity investors
Buy/Sell events, where partners can buy in or cash out their equity
P.S. Even if you are a 30-year-old sole-owner with no intention to sell for the next 30+ years, a basic corporate governance routine is smart. You never know when something happy (a strategic buyer willing to pay 20x EBITDA appears!) or sad (you get hit by a bus and your spouse is suddenly running the company!) will happen that requires complete and well-organized corporate records.
Five steps for business owners to practice good corporate governance
Step 1: Hire a qualified outside expert or form an outside board
With an outside professional, you will get an objective perspective on your company and a high-quality road map to improve business value. Often, a valuation professional is your best option since we have a lot of experience taking a holistic view of a company including analyzing complex corporate formation documents, financial statements, and projections. Think of using a valuation specialist as a long-term partner rather than a one-time transaction. The benefits of maintaining a relationship include favorable fees for valuation updates, as the appraiser will gain efficiency by learning the nuances of your business and maintaining a detailed historical file. The best appraisers want to be part of the company’s journey over time. If it makes sense, and you have a good network of trusted advisors, an outside board is a great idea, if only to keep you accountable to the road map.
Step 2: Check in regularly
Establish a cadence that makes sense for your business’ strategic goals and ownership group’s needs. A rule-of-thumb is performing a comprehensive business assessment, including a valuation once every 3 years, but common signals that you need a new valuation include changes in capitalization, new industry trends, or the gain or loss of key customers or corporate leadership.
Step 3: Stay organized
Maintain a file of your key corporate records: operating agreements or articles of incorporation, detailed cap tables, tax returns, financial statements, corporate bylaws, annual budgets, etc. Then invest time to review and update them as necessary, but at least annually. These “form” documents are often misunderstood, yet losing track of the documents can prove to be very costly. Keep in mind what would happen if you get hit by a bus. These documents should be secured in a data room as well as in hard copy, and accessible by at least one other trusted executive or perhaps attorney or advisor.
Step 4: Get stakeholders bought into the valuation process
In order to make smart decisions as a team, your corporate ownership and leadership needs to agree on the direction of the business. A comprehensive valuation is a great way to kick off conversations. Choose a valuation professional who can not only perform an analysis, but also facilitate a rigorous discussion about the relative merits and likely impacts of changes to the business strategy. The end result of a valuation process should be that all key stakeholders understand the supporting rationale for the present valuation and understand the factors that could create higher future valuations.
Step 5: Take action
A quality valuation serves as a report card for your company. Seize the opportunity to increase the value of your company by addressing problem areas or attractive opportunities to raise value. Maybe your revenue over-relies on one customer, or your debt capacity is underutilized. The valuation will quantify how much you would give up in a sale for making these operating decisions. Use that information to reconsider how you manage your business and make changes that will put more money in your pocket.
Need help brushing up your corporate governance? Let’s talk!
Liza Bowersox
Founder and Managing Director
(804) 482-0689
liza@artemisvaluation.com
