“As shocking as it may sound, I believe that most owners of middle market private companies do not really know the value of their company and what it takes to create greater value in their company … Oh sure, the owner tracks sales and earnings on a regular basis, but there is much more to creating company value than just sales and earnings”
Russ Robb, Editor, M&A Today
Creating value in a privately held New York company makes sense whether the owner is considering selling the company, plans on continuing to operate the business, or hopes to have the company remain in the family. (on a side note, of the businesses held within the family, only about 30 percent survive the second generation, 11 percent survive the third generation and only 3 percent survive the fourth generation and beyond).
Building value in a company should focus on the following components:
Industry – It is difficult, or likely impossible, to build value if the business is in a stagnating industry. One advantage of privately held firms is their ability to shift gears and move into difference sectors or markets. For example, one firm that made high-volume, low-end canoes shifted to low-volume, high-end lightweight canoes and kayaks to meet new market demands. This saved the company and clearly added value.
Management – Building depth and quality in management staff and creating a succession plan also builds value. Key management employees should have employment contracts and sign non-compete agreements. In situations where there are partners, “buy-sell” agreements should be in place. These arrangements always contribute to value.
Products or Services – Of course, a single product or service does not build value. However, if additional or companion products or services can be created, especially if they are non-competitive in price with the primary product or service – then value can be created.
Customers – A broad customer base that is national or international is the one key to increasing value. Localized distribution that is focused on one or two customers will detract from a firm’s value.
Competitors – Being a market leader adds significantly to value, as does a lack of competition.
Comparative Benchmarks – Certain, benchmarks (revenue per square foot, R&D investment percentage, inventory turnover, gross profit margin, etc) can be used to measure a company against its peers. The better the results, the greater the increase in the value of the company.
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