Enhancing Shareholder Value

Photo by Phil Symchych

This is the fourth and final part of business advisor Phil Symchych’s four-part series on how you as a business owner can increase value for your customers, your company and your shareholders. Find part one in our Summer 2021 issue, part two in our Fall 2021 issue, and part three in our Winter 2022 issue.

Is your business a significant part of your wealth and retirement portfolio? What is your company worth today to an arm’s length buyer?

Let’s talk about how to maximize the value of your business to your shareholders or even to a potential acquirer. There are three main steps: succession planning, profit improvement, and performing due diligence on yourself.
Succession planning, or the “Succession Two Step” as I call it, involves planning for management and ownership succession. If you do the management succession part well, the ownership succession piece will be easier. If you have a great management team in place running and growing your business, and you don’t have to be there, you might just decide not to sell but to keep your company and continue to build your wealth.

Check your bench strength

In these times of tight labour supply, it’s very important to be attracting, retaining, nurturing, and developing your management team. Like a sports team, you want to be strengthening your management bench or trading up to get the best talent you can afford. How strong is your management team? What’s their track record? How do you measure success?

Crunch your numbers

The next major factor in building shareholder wealth is profitability, and more specifically, earnings before interest, taxes, depreciation, and amortization (also called EBITDA). One common method of valuing a going concern business to buy or sell it is an earnings multiple approach, where a multiple is subjectively selected and applied to your objective EBITDA.

For example, a mid-market company with an EBITDA of one million dollars may have a valuation ranging from five million to ten million, assuming a range of earnings multiples from five to ten times EBITDA. As you can see, that’s a very wide range that can significantly impact shareholder value…and your wealth. That’s also why it’s important to deal with an expert when valuing your company.

Being proactive to maximize EBITDA is also advisable because that has a direct impact on valuation. What is your EBITDA and what are the trends?

How are valuation multiples determined? The answer: subjectively, based on various factors and competitive information. Factors include your competitive position or moat, strength of management, industry outlook, growth trends, quality of customers and suppliers, your people, intellectual property, and scalability, just to list a few.

If you have a strong management team in place and don’t need to be there, and the company has a positive and growing trend of profitability with good customers and reliable suppliers, then the multiple will typically be higher. If you don’t have a business, but really a job where you do most of the work and make most of the decisions, the multiple will be low. Very, very low.

Know yourself

The final method of increasing shareholder value is to perform due diligence on your own company as if you were an outsider looking to acquire it. Why do that? Well, succession planning begins in one of four places: kitchen table, boardroom table, emergency room, or funeral home. The last two are not good. By performing due diligence on yourself and organizing and cleaning up your business so it’s ready for sale even though it’s not for sale, it will be more valuable.

If you have minority shareholders, their share values are often subject to a discount because they will not have sufficient votes to control the company and are subject to being controlled by the majority shareholder. Another concern for all private company shareholders is the lack of liquidity of their shares, as there is no public market to buy and sell private company shares. Specifying clear valuation formulae and offering funding arrangements in
your shareholder agreements may partially offset these concerns.

Business owners are busy people. You’re focused on taking care of customers, engaging their teams, and reacting to important issues like supply chain, pandemics, and rising interest rates. By taking a long-term view of your business and focusing on succession planning, profit improvement, and preparing your business for sale, you can maximize your company value and enhance shareholder wealth.

Those steps will help to build your shareholder wealth whether you keep or sell your company.

How are you going to increase your company value for your shareholders?

Full speed ahead!