The recessionary hangover of the past three and a half years has made it difficult for many businesses to boost sales to meet shareholder expectations and increase private company valuations. Maximizing a company’s value in a period of slow demand growth or declining sales is a difficult task.
There are, however, several ways to improve your company’s worth in the eyes of your financial institution, your investors and future buyers when positive top-line sales growth is not an option.
Corporate valuation measures the health and power of your company at any given time as viewed by persons or entities that have a financial interest in your firm. As defined by mainstream corporate finance experts, corporate valuation for private companies is not simply the value of all assets minus all debts—the value of your company is truly in the eyes of the beholder. Regardless of whether your company is being scrutinized by banks and lending institutions, investors or potential buyers, corporate value goes beyond higher sales and greater profits. There are other ways to be proactive about maximizing corporate value, and this article summarizes 10 best practice review actions company leaders can implement right now to help improve company value without increasing top-line sales.
Practice #1: Reduce customer concentration
Any business with accounts receivable or cash sales from a single customer exceeding 15 per cent of total receivables is subject to a valuation risk downgrade from banks and other lenders. If sales can’t be spread across a wider customer base, try to create as many layers of protection between you and the customer as possible by signing multiple term contracts with staggered expiration dates. This way high CC sales can be broken up into smaller contract pieces.
Practice #2: Reduce and refocus SKUs
With the market downturn, many companies were left with unsold stock of high volume, low margin SKUs. There is evidence that higher-end consumers are increasing their purchase behaviours faster than lower-end consumers. Hence, your strategy should be to focus on those who are still buying by providing new, high-end, high margin products, thus creating a relative SKU re-balancing in your product portfolio.
Practice #3: Re-evaluate your supply chain
analysing supply chain purchases and implementing an e-procurement solution is a great way to save on costs. Look for a solution that reviews total purchases in each department and eliminates the more expensive process of engaging smaller-volume vendors. While key suppliers are often a lifeline, it is important to also put back-up suppliers in place as a way to keep everyone honest and more competitive.
Practice #4: Do an IT system checkup
An IT review and tune-up is a key success factor that should be performed at least once a year in order to map company needs to available best-in-class solutions. By having a more comprehensive information technology program, you can reduce other indirect costs as well, such as CPA/audits, tax preparation, financing and inventory carrying costs, while increasing the value of your business to potential buyers and investors down the line.
Practice #5: Review marketing and advertising ROI
Few executives actually know how much they can afford to spend in order to win a sale because it is a complicated mix of variables. You need to examine your advertising return on investment (ROI) and determine where you can get the biggest bang for your buck. It is also important to put in place accurate and reliable ways to best measure advertising and marketing ROI.
Practice #6: Reduce overhead expenses
The economic downturn has forced many companies to look more closely at where overhead selling, general and administrative (SG&A) expenses are being spent. In an overhead review you should look for how well you have empowered managers to cut costs in each department and how well your company communicated guidelines and rules to enforce a discipline and structure that validates and verifies overhead spending per department.
Practice #7: Track financial performance ratio
There are eight key financial ratios that are important for you and your financial institution to track: income, profitability, liquidity, working capital, bankruptcy, long-term analysis coverage and leverage.
In the past year many firms took too long to figure out what they needed to do in advance in order to meet the performance metrics for their bank. If you know sales are down, find out the financial ratios your bank needs to see and work to keep them in line before it’s too late to act.
Practice #8: Hedge against increasing COGS
Take an overview of all your inputs to your cost of goods sold (COGS) per product line now, while commodity prices are lower. Raw material price movements can dramatically affect profits period to period, and valuation fluctuations can follow earnings before interest tax, depreciations and amortization (EBITDA). Try implementing a hedge strategy—if public companies can hedge costs by buying a futures contract to lock in prices, why not you? Create ways to “smooth out” input costs over time and in turn ease the ups and downs of price and margin pressures.
Practice #9: “Breed” new products
Most companies have cut R&D over the past few years to save money; however, this can be a losing strategy over the long term. Even one new successful product, if launched properly, can have lasting positive effects on company valuation. You don’t have to have the next Apple iPad up your sleeve, but “signaling,” or creating the impression that you are continuing to develop new products, can be important to a market, staff and future investors who expect continuing innovation.
Practice #10: Review your capital structure
It is important to make sure you are operating within typical industry guidelines for debt vs. equity ratios of comparable firms. If most companies in your industry have 40 per cent debt on the books and you have 70 per cent debt, your valuation could suffer even though your cash flows can meet interest obligations. Bankers, buyers and investors love to see standard metrics balanced across debt vs. equity in order to compare your firm’s future with best practices in the industry.
These 10 best practices for contributing to a healthy bottom line require executives to plan for the long-term financial health of the company, sometimes at a short-term cost. The firms that are proactive about taking steps to review their situation and improve their processes in the face of sales shortfalls will be better positioned to maximise any advantage the market provides in the year ahead. They will also be more prepared to show financial institutions, investors and potential buyers down the line an increasing valuation roadmap when sales alone don’t do the trick.
NOW WATCH: Ideas videos
Business Insider Emails & Alerts
Site highlights each day to your inbox.