Driving Your Company's Value

The Official Business Link to the US Government

We recently found this site (www.business.gov) with lots of information for the business owner/manager.  The site content includes: 

• Business guides under 16 major topical headings
• Data and statistics under 9 major topical headings
• Hundreds of frequently asked questions under 12 topical headings and 12 industry headings.
• Downloadable government forms.

Check it out –- something for most every business owner/manager!

Training Your Banker

To get the most out of your banker (bigger loans and more service) you have to train them.  So the two key questions are: what do you have to train them to do and how do you train them?

The first question is easy to answer. You have to train them to trust you!  To trust that you really know your business, know how to manage your business and that you are prepared to handle problems that arise, even if you need a little help from the bank.

The second question is more complex and actually requires effort on your part.  Here are 6 things you can do to train your banker:

1.  Meet with him or her regularly (at least quarterly) in person.  Be sure you are meeting with a decision maker and not one of the bank’s friendly business development officers who have no decision making authority over granting loans.  Don't be fooled by a big title, banks have lots of Vice Presidents with no authority.

If you can not meet with a decision maker, meet with the development person, as they will be your only representative inside the bank. Remember the bigger the bank and the smaller your business the harder it will be to develop a working relationship with a decision maker in the bank.

The less contact you have with a decision maker, the more important the rest of the training process becomes.

2. Educate your banker about your industry. Teach them about the current risks (every industry has them) and the future changes taking place in your industry.

This is your opportunity to show them you really understand the business you are in and how to take advantage of the opportunities it presents now and will present in the future.

3. Educate your bankers about your competitors, your position in the market place and how you differentiate yourself from the competition.

4.  Provide your bankers with regular financial statements (prepared within 10 days of months end).  Discuss with them your key financial ratios and how they are improving or deteriorating.  Banks do not like surprises! Surprises are the fastest and most effective way to lose your banker’s confidence in you.

Tell your banker how you are going to correct the problems causing the deteriorating financial ratios and or conditions.  Be sure to actually fix the problems not just tell them you are going to fix them.

This process also educates your banker that you can manage the business and are more than a good technician, who can make widget, develop a marketing plan or fix a client’s toilet.  Your banker wants to trust you, if you can demonstrate you are on top of running you business.  Bankers make money by leading money to people they trust.

5. Provide your banker with regular cash flow projections (including balance sheets and income statements) that show them in advance when you will pay off your loans and when you will need to borrow more money.

Projections are a confidence builder that helps ensure you don’t catch them by surprise.   Bankers are much more likely to lend you money for planned situations (even if negative) than for surprises.

6. Provide your banker with a written business plan. This is extremely important for communicating with the loan committee who will approve your loan request when you can not meet directly with them.

Do you really want to depend on the banker you meet with to remember everything necessary to communicate your ability to repay your loan from the bank?  A well developed business plan will demonstrate your ability to manage your business and not your proficiency in the technical side of the business.

If you follow the above six steps you will train your banker and significantly improve your chances of getting the loans you need to grow your business.  Even more importantly, you will increase the value of your business.

A Framework for Approaching Compliance

The whipping boy of the accounting world for business management over the past couple of years has been “compliance,” and particularly compliance related to Sarbanes-Oxley (SOX). Articles for the good, the bad and the ugly relating to the effort, cost, etc. of compliance litter the media and internet. I would like to take a step back for a moment and propose a context and attitude that keeps compliance and management efforts in perspective. I begin with the two following core assumption:

Unless a business operates in the not-for-profit sector, making a profit is a key, if not the primary, goal of the entity’s efforts. Within that context, however, all business entities have a “social” responsibility to the economic environment in which they operate to be good stewards of that environment’s resources, which are afforded to them by that environment in their pursuit of profit. The laws and regulations set up to monitor the activities and reporting of business entities activities within the environment exist to protect that environment and make it a desirable place for both the business and non-business inhabitants.

and

All successful businesses have consistent repeatable, efficient “processes” in place that drive the entity’s efforts in the generation of profit. Those that don’t will ultimately fail.

Applying these assumptions, one of business’ responsibilities in the pursuit of profit, is to comply with regulations designed to ensure that all of the environment’s interests are met as well as the business entity’s specific interests. To this extent, compliance needs to be considered as part of the profit generating process as opposed to “non-profit generating effort.” Preserving, maintaining and enhancing the economic environment a firm operates in helps to generate more profit through better resource management and development and community support.

To reach effect, profit supporting compliance levels, then requires that compliance activities become consistent processes and not once a year “project-based” efforts. It is incumbent on every business entity to incorporate a set of values that enables the design of compliance efforts infused into every process that a company employs in such a manner as to generate value and promote profitability while remaining in “compliance.” This promotes consistent review of business processes, activity flows and efforts that not only keep the business in compliance, but create value by through the identification of needed operating improvements that will produce more profits.

It is my contention here that the development of company values that include compliance processes that add to the bottom line is far more profitable than taking the chance by simply ignoring or making “annual projects” that take as much or more effort.

Value Based Management.net

One of my favorite websites is Value Based Management.net  where I go to find out about business terms and theories.  In its, About Us section,  the Website says: 

"We provide learning materials explaining management methods, models and theories on strategy, performance, finance, valuation, change, corporate governance, communication, marketing, leadership and responsibility…"

Check it out and you will become a regular user too.  http://www.valuebasedmanagement.net

Making The Right Decisions

The Association for Strategic Planning recently completed their annual conference in Marina Del Rey, California.  The first keynote speaker was Michael Mankins, a San Francisco based partner with the consulting firm of Bain & Company.

He concluded his presentation on strategy development with a quote that we all should remember as we think about our own companies and others we may work with in some sort of advisory capacity. His quote on the importance of making the right decisions follows:

“It's not the decisions companies make that most separates the winners from the rest; it's the decisions companies fail to make - either because they don't spot the right opportunities, they don't make the right choices to capitalize on them, or they don't mobilize to deliver results...”

Value from an Investment Banker’s Perspective - 1st in a Series

      Investment bankers deal in the real world of MARKET VALUE. Market Value can be defined as the highest purchase price available in the marketplace for selected assets or stock of a company.  But in my Market Value world, no value is established until a transaction takes place - a check is written, the contract for services and the earn-out (if part of the transaction - and it usually is) is negotiated and agreed to by all parties.  Opposing parties often, in reality, value the earn-out and service agreements at remarkably different values, even though they have accepted the terms of the agreement, in some cases this aspect is discounted to zero.  The seller has to accept an offer that meets his or her objectives which are not always purely financial.  Rob Slee, author of Private Capital Markets and Midas Managers often states “Owner motives matter most” when addressing transactions in middle market businesses.  We have reduced this to “OM³” in our practice.  What this means is that owners influence the Market Value of the transaction through their motives. If you define motive as “a goal that initiates an action” then you can see how everything an owner does within his business influences Market Value.

      Acquirers of businesses also have different motives and fall into several different value worlds. These include financial buyers, strategic buyers and a host of others and they all establish the value of a potential acquisition based upon their own particular motives and within their risk/reward criteria.  This leads to a discussion of cost of capital and how it influences value, which we will discuss later in this series.

      Businesses are often valued upon a multiple of EBITDA (Earnings Before Interest Taxes Depreciation and Amortization).  Within a given industry and within companies of a given range of size, we always see a range of value.  This is true whether the information comes from appraisers, from bids for companies by acquirers, or from published transaction data.  Since there is always a range of value, based upon EBITDA, then there is more to value than just EBITDA.  And this leads us back to motives.

      Buyers will evaluate and establish a value for a company based upon financial information and upon the intangibles that they believe contribute to (or take away from) the value of the company.  The business model creates the value of the company and the owner has the ultimate influence upon the business model due to his motives, so he has the ultimate say as to the value of his business.

      The intangibles that acquirers of businesses place value upon, and the actions and initiatives that owners can take to increase the value of their businesses, will be discussed in the next segment of this series.