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Rising or falling interest rates and business valuations

Nov 9, 2022

Many accountants undertake only annual accounting assignments, while others also compile monthly management accounts. Chances are good that there is always an element of consulting involved, whether it be tax consulting annually, monthly or on an ad-hoc basis. When you compile monthly management accounts, you may be more closely involved with critical business decisions. Are you a trusted advisor to your client regarding critical management decisions and planning? Are you part of their inner circle of advisers, or do you only stick to accounting and keep score of what happened in the past? Are you a scorekeeper or value builder?

So what does it mean to maximise value? The perception could be that value only matters when the business is sold, but the truth is that value is harvested throughout the lifetime of the business. How is this? By maximising cash streams and reinvestment into the business, generating maximum combinations of dividends and proceeds from the sale of business or shares over the long term.

How can value be maximised over the long term? The short answer: manage the critical value drivers consistently and sustainably. These key value drivers should enhance sustainable cash flows, protect shareholders’ interest and build a business that can help unlock synergies for potential buyers in the future.

The impact of value drivers can be calculated, simulating different value outcomes. The higher the valuation outcomes, the more impactful value drivers are selected. These value drivers should be calculated by doing valuations and plotting the strategy to pursue the best value drivers. Frequent valuations and variations of assumptions indicate the best value drivers to pursue and formulate a roadmap to the maximum business value.

It is not too early to start preparing for the business’s eventual sale to maximise the ultimate exit value. Management will have enough time to shape the business so potential buyers can realise synergies and unlock additional value for themselves with such an acquisition. Such value added could be cost savings, enhanced revenue, new growth opportunities, etc., for a post-merger entity. These synergy benefits will likely engineer a transaction price premium for the sellers. Potential buyers and synergies should be understood so the business can build capabilities to enable potential buyers to unlock these synergies.

A note of caution: When selecting key value drivers and synergy strategies to pursue, ensure those are well within the control of the business. Ultimately it is no use to build an unrealistic plan that cannot be executed.

Shareholder value has to be protected throughout the lifecycle of the business to maximise value in the longer term. This is because there usually are several events with the potential to deplete shareholder value if great care needs to be taken. These could include sub-optimal acquisitions, issuing shares at less than fair value, undertaking restructuring with unintended tax leaks and many more—all the hard work to build value could be in vain if that value is not protected.

Frequent business valuations provide the framework to build and protect shareholder value. Assisting clients with this valuation process is a critical resource to help them manage business value as part of their trusted inner circle. It is an excellent opportunity for accountants with frequent contact with clients, whether monthly, annually or even in between.

Are you a scorekeeper or value builder?

Worth.Business is here to empower you to manage value for your clients.


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