The Value of Value: Why You Need to Know What Your Company Is Worth
Executives' need to understand the value of their mid-market company is just as important as it is for leaders of large, multinational firms
Every day the stock market is open, CEOs of public companies receive a de facto report card from investors telling them how much their businesses are worth. Share price says a lot about what’s going right or wrong with the business and about economic and market pressures they need to know.
Middle-market executives generally lack that daily barometer, as well as the phalanxes of staff economists to help them crunch the numbers. But their need to fully understand their company’s current value is every bit as great as that of any leader of a multinational firm, and maybe greater.
This section of the report originally appeared in Middle Market Executive’s Summer 2022 issue. Read the full story in the archive.
After all, valuation serves as the best prism through which to examine all the individual qualities of your business. A close analysis of your income, cash flow and balance sheet, along with all your company’s strengths and weaknesses, serves the underlying purpose of helping to guide your strategy and create new value.
Risks of Flying Blind
As an investment banking advisor to middle-market companies for more than 30 years, Reed Phillips has seen too often what can happen when hard-working owners and CEOs make crucial decisions without this knowledge. He recalls one company that received a generous offer of $150 million from a prospective buyer. Though it was a scenario many entrepreneurs dream of, the owner chose to follow another entrepreneurial dream—creating a family legacy. Over the next several years, the family invested $10 million of profits and the lion’s share of their energy into a forward-looking digital strategy.
Unfortunately, while this process was underway, their core business began to decline—imperceptibly at first, and then steeply. Their intense focus on the new strategy diverted their attention. They were prompting customers to migrate to digital platforms, at the expense of the traditional business. Soon, the core business slipped from profitability, and the digital business, which was expected to replace those profits, was underperforming. By the time Reed began working with them, most of their efforts were aimed at avoiding bankruptcy.
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What went wrong? In short, the family had no working knowledge of the value of their business. The few-and-far-between valuations they’d undergone to obtain financing always seemed more like nuisances or distractions from more important matters at hand. Yet a clear, updated sense of the company’s worth might have encouraged the founder to put emotions to the side and accept that $150 million offer. Or it might have upheld the conviction to hold onto the company and unlock new areas of value. It might have helped guide the digital strategy, telling the family how much time, effort and cash to devote to the business. And it would have alerted them to the potential decline of their core business long before that reached crisis levels. They would never have left such an important part of their business on autopilot.
Finding Your Value
If you run a middle-market company and you can say with conviction what your company is worth right now, congratulations. You are part of a small minority. Most of the hundreds of owners and CEOs we have worked with had no systematic approach to understanding what’s driving the value of the companies they spent years—or even a lifetime—building. And they’re taking a huge risk, flying just as blind as the owners of the company described above.
We believe that properly managing and growing your business requires you to undertake a valuation at least once a year. There are many ways to get there. The most common approach is to hire a valuation appraiser, accountant or investment banker. These advisors have the right toolkit for doing this work. However, because traditional valuations can be complicated, time-consuming and expensive, most companies overlook this essential process. They only go through it when they absolutely must—for example, when there’s an offer on the table, or they need a loan or a partner wants to cash out.
To make the valuation exercise easier and more approachable, we have created a new valuation methodology that we call QuickValue. It’s based on Phillips’ experience working directly with hundreds of middle-market leaders, helping them better understand what their company is worth, and why. As described in our book, “QuickValue: Discover Your Value and Empower Your Business in Three Easy Steps,” our method can be implemented by your internal team without future financial projections. Most of what you need is at hand, and what you don’t have can be easily obtained.
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QuickValue emphasizes a close analysis of your firm’s most important value drivers—those characteristics of your business that make it unique. After identifying your value drivers and assigning a score to each, you and your team use market-rate multiples of public companies, with some adjustments for M&A transactions involving private companies, to assess the value of businesses similar to yours. The next step involves bringing it all together with a few straightforward calculations to determine what your business is worth.
Whichever method you choose, the key is to get going on valuation now. Conduct one this year, and every subsequent year without fail for the life of the company. This is one of the most important things you can do to help grow your business. While your competitors continue to make essential decisions based on some “X times EBITDA” valuation figure they overheard at an industry conference, or on imprecise revenue projections, you’ll be creating an ongoing record of value creation based on the specific characteristics of your firm. And you’ll have a blueprint for how best to use your resources as you plan for the future.
This article was adapted from “QuickValue: Discover Your Value and Empower Your Business in Three Easy Steps,” published by McGraw Hill in December 2021.
Reed Phillips is CEO of Oaklins DeSilva + Phillips, a TMT investment banking firm in New York City. Before becoming an investment banker, he co-founded two media companies, which were backed by venture capital investors, and was associate publisher of The New Republic magazine.
Charles Slack is a business and financial writer and award-winning author of four books, including “Liberty’s First Crisis: Adams, Jefferson, and the Misfits Who Saved Free Speech” and “Hetty: The Genius and Madness of America’s First Female Tycoon.”
