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Corporate valuations – Premiums start w/ the foundation

September 18th, 2008 Comments off

Some recent conversations and emails have prompted discussions regarding the valuations placed on a company and how to move towards achieving a premium. While there are some PE / VC firms that seem to have their “formula”, the process of applying a valuation is a very fluid process that is affected by an unlimited number of elements. The most obvious are trends within an industry, the company’s market share within that industry, as well as the market’s view of the company in question. There dozens of data points to start with. One thing is for certain….securing a premium valuation does not happen over night. It starts with methodical planning that begins with a solid internal foundation and extends to the external efforts directed at satisfying the customer base. It’s a journey and not the result of impatience.

This is not rocket science but it does take the formulation of a specific goal and a disciplined approach. Whether your company is working on a succession plan or working towards an acquisition, discipline is the key. And it’s not going to be just a discipline focused on financial results. The discipline has to start at the operational foundations of a company. The potential buyer of your company does not want to inherit a myriad of headaches or a company that needs a complete facelift. They want a company that will be a complement to their bottom line, their operations, and will be accretive in a very short amount of time. Any areas that are viewed as a “fix” are going to bring down your valuation.

1. What is the state & accuracy of your budgeting, forecasting, and planning process?
2. What is the quality of your working capital elements? Inventory, A/R, etc….
3. What is the quality of your employee base and their skill sets? Tenure, degrees, etc.
4. What is the extent of processes documented within the company?
5. What is the quality of the information systems that are in place? Quality of data….?
6. What is the state of the customer base? Strong relationships, reliance on one customer….
7. What is the state of the vendor base? Is there any single source risk……

This is far from any type of an exhaustive list and the typical due diligence checklist will make most managers heads spin. When these elements are not in place and they need to be addressed last minute before any type of a potential deal, it will typically result in mistakes or the identification of weaknesses in the business. It also means that the efforts of management will be pulled away from the day-to-day operations, which might result in decreased short-term performance. The few issues listed above cannot be remedied in a month or two. They need a much longer planning window to address. When these elements, and many more, are dialed in it will result in a much higher premium in placed on the entity. Strong foundations result in premium valuations.

Thanks for reading . . . .

Jeffrey Ishmael