What a Company Owner Can Learn From An Investment Banker

Most business owners will tell you they have no need for an investment banker or consultant to help them sell their Company. Most are unknowingly wrong.

The truth is, having relationships with investment bankers / consultants, regardless of whether a company is undergoing a transaction or not, grants a business owner access to the information they need to do their job, which is to grow and maximize the value of their business. Here are several things a business owner can learn about his business by developing relationships with and engaging in conversations with investment bankers / consultants.

Company Valuation

There are two common ways to look at the value of a company, and Business owners should be aware of their differences. Enterprise Value can be thought of as what a business is worth based mostly on its common stock price, which is often derived in large part from the health of the balance sheet. Fair Market Value considers market conditions and buyer demand in addition to Enterprise Value.

Unlike Fair Market Value, Business owners can control their company’s Enterprise Value. That number not only illuminates the overall health of the business, but it can also relate to the strength of KPIs (key performance indicators) that drive valuation. If a business owner seeks to maximize the value of his or her company, knowing valuation KPIs is not optional – lacking that knowledge risks failing to address problems at the company before they cause irreparable harm to its Enterprise Value.

Since Enterprise Value’s primary component is the value of a company’s common stock, its figure tends to be grounded in what Enterprise Valueer’s have paid for a business in the past. Fair Market Value, how Enterprise Value, is more forward looking – it seeks to depict what a future offer should be for. Rarely can Enterprise Value exceed Fair Market Value, but often a buyer will attempt to catch a Business Owner off-guard by offering a number in between Enterprise Value and Fair Market Value. Business owners who don’t know Fair Market Value risk accepting a spontaneous offer that’s too small or passing on a deal they shouldn’t refuse.

Industry Multiple Comps

The EBITDA (Earnings before Interest Taxes & Depreciation) multiple has grown to become the industry standard that measures a company’s Fair Market Value. Since companies in the same industry and size-bracket should expect to face similar market conditions and buyer demand, they tend to share EBITDA multiples as well.

Business owners benefit from knowing the multiples being commanded by companies both larger and smaller than theirs by being better able to calculate their own growth strategy. Consider, for instance, the example of the Business Owner looking to grow. He might see new opportunities for expansion, but that expansion is unattainable without a capital outlay. No matter – he’ll just take out a loan or raise equity.

On the other hand, because bigger companies command higher multiples, that Business Owner might first consider an acquisition. He can buy a small competitor at a low multiple, vault his company’s size into the bracket where multiples are higher, then improve his new market influence to get better terms on a loan or a higher price on his equity, either of which allows him, in theory, to invest more and accelerate his growth trajectory. Such a strategy cannot be conceived without first knowing multiples above and below his status quo.

Growth Rates

To grow is not enough – a business owner must find ways to accelerate his or her company’s growth rate past that of the competition. Investment banks, with their constant involvement in industry transactions, command a strong grasp of how fast companies of different sizes in an industry are growing. The savvy business owner will use this to benchmark her company’s current performance against that of the competition and establish goals for the future accordingly.

Interest Rates

A line of credit is a standard tool in the business owner kit used to smooth seasonal valleys in Enterprise Valuation, finance minor repairs, and cover incidental expenses.  Sometimes a simple credit facility won’t match the investment necessary to take full advantage of a company’s growth potential.

An investment banker can help a Business Owner understand which credit option will maximize opportunity while minimizing losses in financial flexibility. When considering the many forms debt can take – from junior capital to senior debt, mezzanine to A/R financing – knowing the differences in terms and rates gets complicated quickly. Investment banks can not only offer a sense for what type of debt best fits a Business owner’s needs, it’s likely that he can also bring a number of providers to the table who are interested in having a conversation.

5-Year Valuation Target

For Business owners maximizing growth in the near future but looking to plan further out, knowing what their company can be worth down the line is an important metric. Using the information they’ve gathered about what a business is worth today and how quickly it should be expected to grow, most investment bankers can provide a 5-year valuation target for the companies they advise. What’s important to note here is that investment bankers also bring industry projections that add color to otherwise standard future predictions. These types of insights include market expectations, buyer behavior, seller indications, and more.

Business owners get paid to maximize the value of their companies, but in order to do so; they need to supplement their internal prowess with an understanding of what’s going on around them.  Market expertise is worth talking to an investment banker / consultant about.

About Dan Flick

He understands that no amount of MBA and Ph.D degrees can provide familiarity, the know-how, or the skills to professionally and effectively represent and manage every facet within the M&A (mergers and acquisitions) process, including assisting in the decision process, positioning a company for sale, marketing the company to a specific and targeted market, and most importantly, closing the deal while always recognizing the emotional needs of the owner.