May 2018 | Przegląd Piekarski i Cukierniczy (Baking and Confectionery Review)
SELLING THE COMPANY
In the previous two parts we discussed a series of areas in which a company’s value accumulates. One can build value in some areas while leaving others unchanged. Buyers will undoubtedly conduct a detailed analysis called Due Diligence. This very searching examination will reveal inconsistency in the areas of value. On the other hand, if the majority of the areas are assessed highly, a kind of synergy of added value will occur – not the sum of the values, but its enlargement to the benefit of the company’s market value.
Today we will discuss the further, final areas of value.
W-MOSZCZYNSKI ppic 5-18Area ten: disputes and unfinished matters
Protracted court proceedings, all kinds of penalties and fines, conflicts with employees and customers, proceedings on the part of the authorities or banks – all of this will unfailingly lower one’s negotiating position with investors interested in buying the company. The matter concerns both current disputes and troubles from the past. In order to increase the company’s value, one should avoid collisions with the law, even at the price of applying a wide safety margin which increases the costs of conducting the business.
Investors take over civil liability for the company they buy. That is why they do not like companies with troubles. The most important value for non-speculative investors is the minimisation of the risk of conducting business activity.
Area eleven: the company’s physical and internet image
I probably do not have to convince anyone that a fresh façade, renovated and sweet-smelling office rooms and clean windows will make a good impression on buyers. The principle of the first impression concerns practically all aspects of our life. It has been proved that even the most meticulous valuers or the toughest negotiators are unable to resist this psychological principle.
On the other hand: how will we feel showing investors round shabby confectionery workshops, showing them our shops with dirty windows and peeling plaster?
It is similar with the company’s website. The Achilles’ heel of such sites is their lack of updating. Sites are also sometimes distorted in some less popular browsers; pages are often unfinished or not properly worked out. The internet has become an important medium and shortcomings in this area may also result in a lowering of the company’s value before the investor has even knocked at our gates. On the other hand, a nicely designed site with an interesting interactive system for searching for information about products (for example about celebration cakes) will undoubtedly improve the image of the confectioner’s shop.
A good way of assessing the company is to invite a few independent persons and encourage them to formulate critical comments about the website, the interior decor or the appearance of the company’s premises. Thanks to this one can obtain invaluable information and correct the shortcomings.
Area twelve: market share
There is no better method of raising a company’s value than buying out another, smaller company which possesses a sales network. In this way a certain market share is taken over, and market share is something which constitutes a large part of a company’s value. One should, however, be careful not to treat oneself, along with the buying out of the market, to a nightmare in the form of a badly managed and loss-making company. Such a situation may bring the opposite effect as regards value. The market can be expanded quickly by expansion into other, more distant regions; one can take over a competitor’s network. Before a sale, intensifying sales in the market one currently holds is not recommended, because this is usually connected with lowering the price and with competitive struggle. When we are building value we avoid price wars and concentrate rather on expansion.
Area thirteen: working capital loans
Investors intending to buy a bakery or confectioner’s shop know perfectly well the principle which says that the cheapest money is borrowed money. Seeing the absence of operating loans in the company’s balance sheet, investors may reach two conclusions: either the bakery is incurring unnecessary capital costs by tying up its own capital in operating activity, or something is wrong and the company did not get a loan from the bank. In other words, investors see weak management in the area of financing the business, and so the company’s value falls.
Area fourteen: production technology
Investors, especially those who represent a larger investment group, react allergically to information from the due diligence of companies about outdated technologies. We know that in a bakery old techniques are sometimes better than modern solutions. Nevertheless the quality of technology is a sensitive point in the assessment of a company’s value, to which attention should undoubtedly be paid.
On the other hand, if the company’s market advantage rests on a modern technological solution, then this will undoubtedly be a factor pushing up the company’s value.
Area fifteen: regular valuations
There is a saying: „what is measurable is manageable”. Following the road of building up a company’s value over many years, one should obligatorily carry out a valuation of the bakery’s market value every two years.
This will not directly influence the company’s value, but it will make it possible to monitor the progress in building it up. A valuation should also be carried out in the case of the introduction of changes in production technology and equipment, or in the case of significant changes in the volume of sales.
Moreover, valuations are carried out after changes of ownership (divorce, the introduction of new shareholders), or in the case of changes in tax law or technology, or after the appearance or removal of barriers to entry into the market.
Building value differs somewhat from conducting ordinary business activity. Sometimes it forces us to take decisions which would seem irrational and uneconomic.
The aim of building value is to raise the sale price. These seemingly irrational decisions may in the future be compensated for by a high sale price, which will assure us and our family a high standard of living and the possibility of development in other fields in the future.
Wojciech Moszczyński
owner of the consulting company K12 Equity Council
Wojciech Moszczyński — graduate of the Department of Econometrics and Statistics of Nicolaus Copernicus University in Toruń; specialist in econometrics, finance, data science, and management accounting. He specializes in the optimization of production and logistics processes. He conducts research in the area of the development and application of artificial intelligence. For years he has been engaged in the popularization of machine learning and data science in business environments.
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