“What’s my company worth?” is THE question that we get from nearly every client that we see. It’s an important question. The value of your company will determine whether equity investors will invest, whether banks or other lenders will lend you growth capital you need, and whether the company will continue to grow or can eventually be sold for what you believe it is worth.
Last week, Tim Sheehan outlined the six critical factors that can drive value:
1) Product or Service
3) Sales and Distribution
5) Operations and
This week I am drilling down on the first one: your company’s Product or Service. I always begin discussions with a new client by asking simply “What do you do?” Yes, before the first meeting we have generally reviewed their marketing materials and have visited their website. Usually our clients have been referred by someone who knows the company, their challenges and opportunities and our ability to deliver value to them. So, even before the first meeting we have a pretty good idea of what they do and how Commenda might add value. That’s why we took the meeting in the first place! But, how they answer the critical question “What do you do?” tells us how management views their company, its markets and their growth potential. How they describe the evolution of the company, their background and qualifications, how they got to where they are today and their vision for the future, tells us how they are unique. It tells us how they are different and valuable to all of their stakeholders, including customers, employees, shareholders and the communities where they work. That differentiation makes them special. That differentiation, in part, defines their value.
As a result, most CEO’s can summarize what their company does and the benefits of what they do in one or two sentences. General Motors might say “We sell cars to transport people quickly, efficiently and safely” or Apple might say “We sell computers, i-phones and iPads that connect our customers to the web.” Instantly we know what they do and make assumptions (right or wrong) about the value proposition they bring to their customers, the size and scope of their operations, and their growth potential (e.g.Is their industry in or out). Whatever the response, it is critical that it be a shared vision of the CEO with everyone working for the company. A common shared vision is critical to get everyone on the team pulling in the same direction.
During due diligence visits, investors and lenders are always listening to see if they get the same answer from everyone they talk to at the company. Does everyone on the team have a common shared vision of what they do and the value proposition to their customers? If not, employee teams might be pulling in different directions, creating dissonance, dampening sales, increasing expenses and ultimately hurting value. Getting everyone on the same page, agreeing to the core products and services of the company, how they want to be positioned in the market and the value they bring to the ultimate consumer is critical. Then comes the second question relating to Products and Services: “Why?”
“Why are you doing this?” Why this product or service?” In the case of GM vs. Apple : “Why cars instead of computers?” “Why do your customers buy your product?” “Why do they buy your product instead of your competitors?” Those WHY questions always lead to a wide variety of answers. How management answers the “Why” questions can determine whether the company can make the necessary changes to achieve a higher valuation. So, let’s take a closer look at what drives value.
There are only three ways to increase the value of a company:
1) Higher Unit Sales (either same unit sales or more categories of products with more unit sales in each category)
2) Higher Margins (either from raising prices or reducing expenses)
3) Higher Growth Rates (reflects growing demand for the product or service and that translates into a higher valuation multiple)
All of the variables that impact value relate back to these three-basic metrics. Positive influences might include: the introduction of new products or services, enhanced sales and marketing efforts, supply chain improvements, automation, new technology, acquisitions, divestitures, strategic alliances, or joint ventures. Negative influences might include: competitive threats, market changes, regulation, taxation, tariffs etc. Regardless of whether they are positive or negative, all of these factors impact either: 1) Revenue 2) Margins or 3) Growth Rates. All three drive value. Commenda’s job is to identify which of these variables can be enhanced and to help management determine which changes/improvements are necessary before seeking additional capital to fund the company’s growth. We do this by asking “Why?”
So, here’s the answer:
Q: “What’s my Company worth?”
A: Not as much as its going to be after you: enhance the top line, manage expenses to improve margins and accelerate your growth rate through compelling sales strategies, strategic acquisitions, partnerships or divestitures.
Commenda can help you achieve each of these vital steps by delivering Capital+PLUS the other critical support services that you will need to attract growth capital. It’s WHY we are in business. We’re here to help you and your company optimize the ultimate value of your company.
Please feel free to contact me, John Runningen, with any comments or questions at JRunningen@CommendaCapital.com or 770-858-0085 or any other member of the Commenda team who can be found at www.commendacapital.com.