Business Insights
Protecting and maximizing business value

Article

Even if you’re not selling your business, consider focusing on peak valuation.

Prepping a business for sale can be a powerful tool for maximizing a company’s value, even when an owner has no interest in selling. The process—and self-assessment—needed to develop an accurate valuation of a business can uncover ways to maximize the value of a company.

“We find that business owners and potential sellers learn a lot about their business by thinking about how a buyer might bring an unbiased and fresh set of eyes into how they’re operating the business,” Gene Bowles, managing director, BlackArch Partners.

Maximizing the value of a business means taking a dispassionate view of a company’s leadership, customers and operations. Here’s how to get started:

Review your management structure. “How deep is the executive team? Do you have people in the right seats to attract buyers?” says Bowles.
Consider your customer base. Relying on a handful of customers for the bulk of revenue is also a risk for buyers. “A self-assessment that reveals a dependence on a handful of customers for revenue can trigger initiatives to diversify a company’s client base,” says Bowles.
Update your systems. Financial reporting systems should be able to produce timely and accurate information. “If your systems aren’t appropriate, then a lot of times you’re not getting good information and you’re running potential buyers off,” says Bowles.
Map your ownership timeline. Clearly defining goals should be the start of any exploration of company valuation. Do you want to de-risk your personal financial profile by bringing in outside debt or equity capital? Do you want to grow the business? Are you thinking about a succession plan and a full exit? What’s your timeline?

The benefits of going through the process of achieving a company’s maximum valuation are helpful even if it is never put up for sale. Working with an experienced banker skilled at assessing company valuation helps make the process more efficient and comprehensive. The guidance of a banker becomes even more important if an owner decides to sell the company.

How the right capital structure can increase business value

Though it’s not well recognized, assuring a company’s capital structure is aligned with its strategy and structure is also an important piece in maximizing business value. For example, say that a retail company’s business strategy is to increase revenues by expanding the number of stores it operates.

Opening new stores takes a lot of money, and often a business will not have the relationships with their banks that will make expansion possible. “When you are a smaller company, you may have individual relationships with a few banks,” says Taylor McCutcheon, managing director, Commercial Corporate Finance, Regions Capital Markets. “That could be a one-off equipment loan here and a real estate loan there and a working capital line of credit somewhere else.”

There are reasons this approach can inhibit a company from maximizing its valuation. For one, managing multiple banking relationships can drain valuable executive time. Another challenge is that financing a company at the asset level can limit its capacity to fully capture opportunities for growth.

By contrast, financing at the corporate level through a syndication can deliver access to necessary funds and flexibility. “I talk to companies about looking at multi-bank credit facilities and having a coordinated debt financing structure where you have multiple banks—often the same banks you were working with previously—lending into the exact same corporate credit facilities,” says McCutcheon. “These syndicated facilities can grow as your business grows.”

Part of maximizing business value also involves utilizing the optimal financing vehicles for your type of business. For instance, one method banks use to assess whether to loan to a business is by analyzing their operations, revenue, margins and sales forecasts. “You figure out what the probability is they can meet their forecast and generate the cash flow to pay us back,” says Barry Bobrow, managing director for Regions Business Capital.

But another method of assessing a company’s ability to repay a loan is to determine how much money a company could generate if it had to liquidate all its assets. This is what Bobrow and his colleagues do when they are considering providing an asset-based loan.

“Sometimes companies are going through cyclical or secular changes that impact their cash flow. In other cases a company may be going through a strategic change,” says Bobrow. “In all of these cases banks may be more willing to lend to them based on that liquidation value than through an analysis of their cash flow. Asset-based loans could prove to be a stable form of financing through periods of change.”

When a company seeks to maximize its value, determining the optimal capital structure is a topic worthy of conversation with your bank.