Shareholders of closely held companies, as well as parent corporations of publicly held divisions, often seek advice as it relates to corporation valuation and the value of their holdings.  While determining the value of a corporation is a complex analytical exercise, there are a number of qualitative factors that indirectly affect value as well as the interest level by prospective acquirors or investors.

Valuation is based on a number of different methodologies that are dependent on the unique financial metrics of a subject company, valuation metrics of similar companies, and industry-specific characteristics, among other factors. But equally as important as the analytical exercise of determining value are the qualitative factors that influence it. Listed below are selected factors that often influence whether companies receive discounted or premium valuations:

• Company Revenues and Operating Profit. Companies with larger revenues and operating earnings before interest & taxes (EBIT) typically command higher valuation multiples.
• Customer Concentration. Minimal customer concentration significantly reduces the risk of lost revenues and operating margin degradation and bolsters valuation levels.
• Industry Growth and Competitive Dynamics. Positive industry growth and competitive fragmentation improve a company’s growth prospects and have a positive impact on value.
• Product/Service Line Diversity. A diversified line of products or services often increases customer retention and reduces risk of lost revenues.
• Reliance on Suppliers/Inputs. Minimal reliance on suppliers reduces overall business risk.
• Regulatory Limitations. Industry-specific regulatory oversight or risk of industry-related legislation may have an adverse effect on a company’s risk profile.

In addition to the aforementioned factors, valuation is affected by ownership aspects such as the marketability (or lack thereof) of a company’s stock on a freely tradable market as well the control or influence with respect to corporate governance.

* * * * * * * *

Opus Advisory Partners provides valuation and fairness opinion services to boards, shareholders and senior management of companies and divisions. In addition, our firm provides advice on a range of transactional, financial and strategic advisory services that include valuation as a core component.

If you were considering the divestiture of one of your lines of business but then learned that a small acquisition would drive significant growth over the next 18 months, would you still exit or instead put the transaction on hold to take advantage of gaining new market share? If you decided not to divest a lackluster division, but later found out that there were significant headwinds negatively affecting growth opportunities and profit margins, would you still weather the storm or instead divest the division and redeploy the funds internally?

Corporations, boards and shareholders sometimes struggle with determining the strategic direction of each of their lines of business.  The same is true for owners and shareholders of closely held, stand-alone companies.  Some lines of business may no longer be strategic, or may be increasingly difficult to grow profitably given their unique characteristics, and therefore it might be time to consider an exit.  Other divisions might need to be repositioned or even expanded to exploit growth opportunities within a very short window of time that could transform the entire company.

This multi-faceted decision matrix is an ongoing challenge for corporate leadership.  Personal emotion and conflicts of interest, as well as the inability to quantitatively and qualitatively assess each available alternative, make such strategic decision making difficult. But the most successful companies are always evaluating their businesses introspectively, including whether to expand, enhance or exit operations.  Expanding the business can create value.  Enhancing the business can unlock value.  And exiting allows shareholders to realize immediate value, the proceeds of which can be distributed or redeployed internally. Determining the course of action is highly dependent on answering the following question: Which option will maximize shareholder value on a risk-adjusted basis?

Companies often face a dilemma when determining their future direction—either grow aggressively to increase value, or exit now to maximize current value.  Investing in the future through efficiency enhancements, organic expansion and acquisition growth can lead to greater profits and margin expansion, resulting in greater long-term value and more attractive exit options.  These alternatives should be analyzed to determine if the incremental value created is worth the risk of giving up the proceeds from a near-term exit, among many other factors.

Trying to comprehend all of the various options in addition to understanding how to maximize value is challenging.  It requires utilizing market/competitive analyses and sophisticated valuation and transaction structuring to quantify and evaluate each of the alternatives.  A strategic assessment of corporate finance options can provide companies, boards and shareholders with a blueprint to objectively evaluate their future on a risk-adjusted basis.  Moreover, the assessment provides an action plan that can be immediately implemented.

* * * * * * * *

Opus Advisory Partners works closely with boards, management teams and shareholders to evaluate their strategic options and maximize value on a risk-adjusted and conflict-free basis.  Our firm also provides execution advisory services to companies seeking to institute specific initiatives.