Things you can do to increase shareholders’ value
Earlier in the year I was asked by a local manufacturing company to evaluate the potential acquisition of a smaller company in a related field. Even though the company looking to be acquired had a very well-known name in its industry, with a long history of innovative products and customer experience ranging decades, upon examining financial statements and other documents, I was asking myself whether I was looking at the right company.
The financial statements and their presentation revealed lack of professionalism and attention to detail, while overall, I was questioning the integrity of the financials. Accounting and financial reporting at this company was done using technology and internal knowledge they possessed with no regard to standards (e.g., US GAAP) and use of modern-day accounting / ERP software. Since it was a family owned business, they simply ran it the best way they knew while complying with the bare minimum requirements of taxation and banking. External reporting simply did not exist since the shareholders were also the managers of this company.
The valuation report revealed a recommended purchase price that was perceived by the target company almost as an insult – their idea of value was never properly researched, there was only a perception that it was high due to certain factors and reasons that only business owners of closely held companies can tell you. The reality is usually much different which is why the acquiring entity must always make sure that the value of the acquired company is fair and represents the true financial condition of the company and takes into account future cash flows from continuing operations.
One good example in this company’s financial statements were the intangible assets (goodwill, etc.). These never underwent testing for impairment and were grossly overstated. Another was lack of reserves for inventory obsolescence, warranty and other key items. Lack of formal accounting and financial management also contributed to a lower perceived value and affected the valuation of the business.
A potential buyer must feel confident that the company they are acquiring is reasonably and professionally managed and that the fair value of the organization is what will be used to negotiate the purchase price and not some highly unrealistic number stuck in the seller’s head.
In our example, the seller and buyer were so far apart that no negotiation ever took place. The seller’s mistake, probably due to inexperience and maybe bad advice, was that they did not implement a proper financial accounting and reporting system, suitable to their organization size and business type.
They also did not implement a planning, budgeting and analytics system and were never able to plan and forecast their financial position. In their mind, their company valuation was based on being in business, under the same family ownership, for over 70 years with a pioneering product line (albeit rapidly declining due to lack of recent innovation and marketing efforts). That must be worth a lot, right? Not really.
How can you change that?
Whether the corporation (or other form of organization) is closely held or not, it is management’s responsibility to maximize their company’s shareholders’ value. The owners and managers must have a proper accounting and finance system implemented where data is accurately collected, processed and used for analysis, financial reporting and decision making.
A seat-of-the-pants management style rarely works and companies that still use it will increasingly be displaced by organizations that have a discipline for methodically planning and relying on data in running their business. Intuition is important and respected but at the same time is equated with gambling or at best making decisions based on only educated guesses.
Accounting, finance and operations technology solutions have been around for quite some time now, constantly improving and becoming a lot more affordable and available to even small companies, like the one in our example. It is the owners and managers’ responsibility to research such solutions and match the best possible technology offering to their business, then implement, maintain and continually use it.
The results will not only enable managements to make reasonably correct decisions but also to arrive at periodic, interim and annual financial statements that are GAAP compliant and fairly present, in all material respects, the financial position of their organizations.
Having such level of accounting, operations and financial reporting will make external audits or reviews, if required or desired by the owners, much easier and less costly.
Finally, a well implemented and executed FP&A (Finance, Planning and Analysis) solution, one that is integrated to and is an extension of the actual accounting system will further add to the perceived value of the organization.
When the time comes, and the owner decides to sell their company, they will have a much more realistic idea of what their company is worth, while conveying a higher value to a prospective buyer, that of a company which is well managed, with disciplined operations, accounting and finance organizations.
Alan Hart, MBA, is Principal Consultant at Pacific Shine Group in Portland, Oregon, with responsibility for client business development and hands-on client project implementations. Prior to starting Pacific Shine Group, he worked in various executive accounting and finance positions with technology and growth companies. Notable is his 18 years in the hi-tech manufacturing industry where he served as Controller, Vice President of Finance and CFO of several privately as well as publicly held companies in the Hi-Tech industry, such as Hybrid Arts, Inc., Hamilton Bay Associates and Syncronys Software. In his role in management consulting, Alan has worked in diverse industries and with a variety of clients, including fortune 1000 companies such as Boeing, Delta Airlines, Intel, Wyndham Worldwide and others, as well as many mid-market organizations such as Guitar Center, Ducommun AeroStructures, Cypress Semiconductor, TriQuint Semiconductor and others.
Combining his skills and experience in engineering with deep understanding of technical accounting, he is able to assist small and medium-size manufacturing companies establish GAAP compliant accounting and reporting systems.