Do you know the value of your SME? Determining the value of a company is an exercise that is generally considered in financing processes, capital increase, searching for new investors or in sales or purchase of companies.
But how do you do it?
There are basically three valuation methods: discounting cash flows, applying multiples and calculating the liquidation value. Transaction advisory services experts are going to focus on discounted cash flow valuation, or discounted cash flows, since it is the most common method and the most suitable for companies that generate positive cash flows.
What can be done to maximize the value of your company?
In general terms, the valuation is based mainly on three elements:
- the cash generation level at the beginning of the projection
- the growth rate of cash flows used for the projection
- the discount rate of future cash flows
Below are five actions that will result in an improvement in the valuation of your company:
1. Increase operating margin
Here, there are no secrets. The greater the ability to generate profits and cash flows, the better the valuation will be. The benefit is increased by increasing sales and reducing costs. So, the questions (among others) that must be asked to increase its margin are the following: does the company have assets – tangible or intangible – from which not all the value they could generate is obtained? What could be the additional sources of income with a higher profit margin? Are there alternative distribution channels to sell your products? What has been proposed to consolidate your bargaining power vis-à-vis customers and suppliers? Is human capital motivated, focused and working at its best performance? Is there potential for reducing structural costs that can increase business efficiency?
2. Increase growth prospects
rate of cash flows during the projection horizon is a determining factor in the
valuation of the company. Is your company putting barriers to entry in the
sector or is it developing a competitive advantage? Are you investing in
growth projects with high potential for generating value for the company?
Having additional growth engines logically increases the potential for cash flow generation, which will increase the value of the company.
3. Improve working capital or working capital
Cash flows, calculated in the context of a valuation, depend not only on the profits generated but also on working capital. Reducing the need for working capital will increase the generation of cash flows, and thus the value of the company.
Working capital management is a delicate matter, since it depends on the balance between risk and return. It is about optimizing the need for working capital, reducing inventories, improving the collection period and deferring payments on a recurring basis, without damaging the profitability of the company, without generating inventory breakage, without strangling suppliers, or worsen relationship with major customers!
4. Refinance your debt
Is part of
the debt of your company higher than the interest rates offered in the
market? Take advantage of today’s low interest rate environment to
refinance that debt! Launch a serious and rigorous negotiation exercise
with your financial institutions to explore ways of optimizing the cost of
resources that they provide.
It is important because reducing the cost of debt allows to reduce the discount rate of cash flows and increase the value of the company.
5. Optimize your financial structure
Your company’s value will peak when the cash flow discount rate is at its lowest. This occurs when the debt level is at its optimum within the firm’s capital structure.
Both above and below this optimal level of debt, the discount rate will be higher, and the value of the company consequently lower. Why does this happen?
On the one hand, because below this optimal level, the proportion of capital contributed by the shareholders is more important, and since the return demanded by the latter is higher, the discount rate will rise. In this case, it is advisable to hire top business consulting firms in India to increase the value of firm. On the other hand, because above this optimal level, the risk of insolvency is greater, which causes an increase in the return of shareholders and creditors, and therefore of the discount rate. In this case, it will be convenient to reduce leverage to reach the optimal level of debt and optimize the value of your company.
Obviously, the potential for improvement of these five levers depends on each company and depends in turn on the evolution of its own economic environment. In any case, acting on those levers does not have to be incompatible with corporate strategy. On the contrary, transaction advisory services India follow a comprehensive strategy that considers all aspects and forces in action around the business, with the perspective of increasing the value of the company.