What is the Secret to Increasing Your Company’s Value?

We are frequently asked by clients and others about how to improve their company’s value. The obvious answers are, increase sales and/or increase profitability. No great insight there. Maybe there’s a small amount of insight in suggesting that a company should improve cash flow, because, while profits and cash flow are related, they are not at all identical.

But what is often overlooked is managing risk. To a certain extent, this is understandable. Risk is unpleasant to think about. Risk isn’t sexy. Nobody ever had a Wall Street Journal article written about them for their great risk management. Risk is hard to even measure, which makes incentivizing risk management hard.

Managing Risk is Where It’s At

Why do buyers walk away from deals? Usually, it’s because of the risk. How do they justify low offering prices? It’s because of the risk they see in the deal. There’s good news, though. Risk can be one of the easiest things to address in your business.

Think about it—as a business owner or leader, you’re almost certainly thinking about how to improve revenue every day, and you are probably obsessed with profits. Revenue keeps the lights on. Profit keeps you happy. And the funny thing about managing revenue and profits is that the results are readily visible. Like positive engagement on social media, they give you a dopamine hit. As someone charged with running my own business, I get it. I feel the rush, too. When Brady Ware asks themselves how they’re doing, they aren’t asking about risk; they are asking about our revenues and profits. When those are good, everyone is happy, and I get the (disproportionate) credit.

Because cash flow and growth are so visible, the chances are good that you’re already doing all or most of what you can to maximize both. You’ve picked the low hanging fruit and even some of the higher pieces. The open territory is almost certainly in risk management.

Let’s Do the Math

The math checks out. Consider a fundamental value formula:

V= (CF*(1+g))/(k-g)

Where:

• CF = cash flow
• g = growth
• k = cost of capital, which is a proxy measure for risk

Because of the numerator effect, growth, and risk impact value the most. You’ve probably already maxed out your growth potential, subject to financial and other constraints.

We work with businesses on improving their processes, documenting them, and then develop key performance indicators.

Know the Recurring Themes when Managing Risk

Indeed, growth itself is quite risky, and you can potentially manage your company’s risk if you can create more certainty. This leaves risk as the source of the greatest value leverage. Recurring themes of risk that we see inhibiting the value of companies include:

Customer Concentration

Do you have one whale client or customer that reliably accounts for 10% or more of your revenue? While it can be comforting to have a large customer providing a lot of your revenue, buyers know that your business is exposed to the potential of that customer leaving, which can suddenly and sharply worsen the company’s financial outlook.

Key Person Risk

Is one person responsible for 80% of your company’s sales? Is there a technology expert in your firm that you’re scared a competitor will poach? Key person risk is very common in companies of all sizes and a buyer wants to know that the great people who helped the company achieve success for you will be available to do the same for the new ownership.

Litigation

Are you in litigation or under threat of litigation? Few buyers have an appetite to buy a lawsuit. If you want your business to maximize your value, you may want to consider resolving the case as quickly as possible, even if that doesn’t lead to your optimal short-term financial outcome.

These three risks are just a few of the potential value inhibitors to your company. Connect with us if you’d like to learn more about how to increase your company’s value by managing your company’s risk.