Build & Protect Your Shareholder Value

A few strategies that we’re actively working with some of our clients now as we’re preparing them not just for sale but for acquisition and where they may need to attract some finance so we’re working on that shareholder value aspect.

So firstly, you know we see a lot of clients that say look we need to focus on growth that’s fine, but growth needs to be sustainable growth it needs to be at a profit level not just at a revenue level and further if you’re going to focus on growth it needs to be done with adequate capital so it needs to be enough to ensure that the growth is a sustainable growth. So, that you’re either keeping your capital employed in the business at a constant level or growing it slightly but you don’t want to have to invest too much in capital employed which will then diminish shareholder returns and shareholder value so it’s finding that sweet spot as you can see in this little table between b and c that’s where value gets maximised and there’s some real simple KPI you can build into your forecast planning that focuses on return on capital employed that’s the key measure when you’re looking at shareholder value.

Similarly, when you are looking at strategies it’s having that value end game in mind you know if you’re looking at product new products new services cross-selling what is the impact on EBIT versus capital employed. If you’re innovating a process looking at the looking at the longer term impact of profit versus the investment, and actually financially modelling that out if acquiring a business does the returns really justify the price so particularly given sort of the state of you know where the economy is where markets are it’s more important than ever to make sure that when you are investing when you are looking at growth that you are getting those right returns.

Then there’s risk you know we talked about earnings multiples, and we get a lot where people come in and they’re told that their business is worth between four to five times, or four to six times and the question is well why 4 why 6. I mean a large portion of where the multiple gets determined is in risk, so the higher the risk the lower the multiple so what we like to do in working out how to maximise a shareholder’s value or at least protected is to understand the risks of that business. Then build into their planning how to mitigate and manage those risks i’ve had several clients that we’ve been working with you know some of them for a while, that have a heavy concentration on one or two customers some of those customers aren’t on contracts some of them were on contract have fallen off. So, part of our business planning is to you know for those clients is to diverse try and diversify into you know more clients looking to have more you know a lower concentration in those two major clients and then also looking to re-engage on contracting with them, so that again when that risk gets looked at it’s well and truly covered and doesn’t end up pushing a multiple down.

You need to be asking the question what really is the intellectual property in your business. You know a lot of people think it’s the good will there’s more to it in terms of what intangible value is, it’s customer relationships it’s contracts it’s the people it’s the processes that you run. Might be a piece of software it might be you know a supplier contract that you’ve got all those things form the part of what your intellectual property is, and it’s often these items that drive the value so you need to be looking at how to protect that IP whether it can be done legally by you know copyright by having contracts or other means having heavy confidentiality agreements with staff or non-competes further a lot of times that intellectual property is in the key person and that’s the owner or founder. So, we really do need to work out how to transition that key person intellectual property from that person to the business, so it becomes business IP and you know once it’s business IP it’s saleable with the business as opposed to sellable with the person and typically you know demands a higher value.

Finally, you know we can’t over emphasise the importance of having tax affairs in tax affairs in order a lot of times we see people embarking transactions and a little bit of planning could have stopped a fair amount of shareholder value eroded by the impacted tax. So, understanding earlier you know is your corporate structure the most efficient for dealing with future tax matters like capital gains tax you know can you make sure that you get access to the CGT discounts to small business concessions. So, that planning now for something that might be two three four five years away will ensure that you know get all the concessions that you’re entitled to the other area that. We like our clients to look at is areas in employees particularly in healthcare businesses understanding that they’ve got their employment taxes correct and that’s often looking at whether people are contractors versus employees looking that they’ve covered their fringe benefits tax adherence to awards is really you know a major part of due diligence that we see buyers looking at and making sure that you know particularly. If you’re a you know a nursing agency or you’re a you’re a business that has a lot of employees and a lot of them are on different awards, making sure that you’re compliant with those awards and then ensuring then that the entitlements that those employees should be should be having a crew to correctly calculated and provided for the work that you do now and you know will pay for itself many times over. When it does get you know subject to an external review, we like to tell clients to operate like a public company you know if possible get an independent on the board you know get a limited scope review of your financials you know you know vendor dd is often you know a good way to make sure that you know when someone is going to look at your books and accounts you’re ready for you know, you’re investment ready.