"The Finance Corner"

How to build your company's value to day for value added sellout tomorrow.

“The Finance Corner”

Stephen Watkins

Guest Columnist

(NU) – Q:  I’ve got nice business which I expect to sell in a few years… what should I be doing today for the future.

- Louis Myers – Albion, MI

This is a question which is rarely asked until to late… A lot depends on the what your vision is for the company .    Value is the holy grail of the finance community…. And it is all a function of the Greater Fool Theory.. but my experiences can be summated in two mantras:…  “You will make more money selling your company than you will ever do selling your product or service” and “Capital can’t fund what it can’t find”…

I’ve lived this.   From companies sold on a multiple of cash-flow… to those valued at 1.2 Billion by the global financial community.  All along the way it was a learning experience.    But more important it was about generating credibility for the company… and exposing it to the audience whether clients or the financial community.

When you look at one of my earlier transactions… it was “unloading” a money losing division.  From the drive northward to shut it down and the manager asking to “Buy it”.   Here was a deal, with no functional tangible value – but it was valued by others.    Certainly this was a captive audience but it started the lesson of Exposure and Credibility to the financial audience.

As I moved forward through my career we took a small contracting company from $100,000 to over $10,000,000 in a couple of years.   This was heads down operations.   I was the entrepreneur who was learning how to operate and manage a growing company versus hire and lead… a common mistake I see entrepreneurs making.   When it came to a selling transaction I was focused on cash-flow versus opportunity… while similarly I pretended that letting others know we were on the market for selling or capital would be spilling the ingredients of our “Secret Sexy Sauce”…. This was my next lesson… understanding that the innovators probably were not looking for us… Big companies have the Not Invented Here syndrome… while nimble competitors don’t really have access to the street and exposure to circulation of financial deals. 

At some point you have to believe that by selling your story… you’ll create more value and opportunity for yourself and your company… than the competitor who now knows a little more about you (assuming they even find out)…  But  “Selling the Story:” is key… Private Business Channel participates in a number of events which I have been around… all to often the CEO gets on air to sell their product,. Which is obviously what they do for a living… but the financial community wants to know about the company… which is made up of products… not a product that makes a company. 

Think about the “Buggy Whip Manufacturer” from the 1920’s…. If indeed the Buggy Whip CEO got on the “Band Wagon” and started to sell his audience on his whips… the financial community would have discounted his value….since the automobile was coming into its own…

The investment community saw this evolutionary automobile potentially obsolescing the buggy whip business… If however the CEO spoke about the “Transportation Accessory” Business”… today Buggy Whips… tomorrow driving gloves.  Now the financial community sees a company that has visions of the future and cash-flow of today.   

Credibility on the street is key… whether Wall Street or Main Street.   Anyone that has experienced a transaction can tell you this…. I had a great conversation with a start up entrepreneur the other day.   He said “we’ve applied for a patent… not because we see this having long term significant value… but because the cost of the patent is insignificant compared to the value increase in the business.”  Well Put….

What is interesting is how entrepreneurs often cheapen their outside professionals at a significant cost of value.    Obviously you need to have a focus on value and transactions… but think of it like this patent… If an audit of your business costs an extra $75,000… but would bring a tangible increase of over $75,000… seems like a sound business decision…. Or even if you are just operating a company with a bank-line.   Check how the interest rate may decrease if you show up with an audit versus a compilation or review…

Further credibility can be gained by quality professionals… My first business had local independent legal and a corner accounting firm.   When I came to sell to institutional investors they discounted these professionals 100%.  That is not to say you shouldn’t use local and/or smaller firms… it means you should have the right team for your aspirations.   If you anticipate an IPO… then you are expected to have a big four audit… same with a law firm.   If you aspire to some regional sale of your company… pick the best talent that has expertise and a reputation in the region.   You will get what you pay for.

My mantra of “Capital can’t fund what it can’t find” is true across the country.   An interesting statistic is 80% of  transactions are done within a  50 mile radius of the venture.   This makes sense when you connect your rolodex and your rolodex’s rolodex together… it breeds a circle of influence around the 50 mile radius… So if you want to maximize the value of your company… then you have to maximize the exposure of your company.

Today if nobody knows you on Wall Street… and you haven’t had lunch with the local investment bankers…. Then nobody knows you.   And nobody going to be extending capital transactions your way.   Of course I hear in my business “So and So called me about buying cause we are hot, hot, hot”… cool… but how many more offers would you had if you took a credible deal to the investment bankers and broker dealers across the nation?    My bet is my mantra “You’ll make more money selling your company than selling your product or service” would come true.

Imagine if you are making a million on the bottom line… and lets assume in this case the “So and So” offered you a multiple of  earnings.   My bet is by selling a credible story about your company can raise awareness and get multiple bidders… All you need is 1x more than “So and So’s” and you are a happy sellor.  

And another thing… what is it about PR and Private Companies!In my business we work with PR Newswire and Private Business Channel…. All which can distribute your message whether product or company driven… and NOBODY takes us up on this. 

I’m sure your director of sales would love to see your product news story picked up so they can show your clients… I’m sure your CFO would welcome positive financial press about your company for the banks… or the investment bankers… all breeds exposure, all breed credibility and all gains exposure to the audience… both your clients, financial supporters and potential suitors… BUT NOBODY DOES IT!

Go figure…

So to put it simply;  whether working with clients, working for a financial transaction…. Gain the most credibility and exposure for your company… Creating the most value for your company.  Put the best people on the team, put the best professionals you can afford (or can not afford not to) and get the word out.   You don’t have to spill the “Secret Sexy Sauce”… but let the world know how well you are doing… or how well you have laid the foundation…  

But sell the company… not the product or service.   And you will create value, you will create awareness.. you will be the force to recon with.

So Louis, if you’re serious about attracting significant capital, it’s time to get started preparing. As you can see here, there’s no big mystery to the process. You just have to turn get credibility and exposure for your vision and your company.

Stephen Watkins is the Chief Executive Officer of Entrex.  He can be contacted at swatkins@entrex.net