21 May 2019
Evaluation of key elements for sustainable investment
Whenever we are called to accompany a potential purchase of a company or entity, the completion of our work must integrate various elements of evaluation of different areas. It is not only a question of evaluating financial indicators, but also of integrating the valuation of non-financial indicators in the valuation that, together, creates value for the company. A company that creates value distributed among shareholders, clients and employees will surely follow a healthy path in profitability and competitiveness in its sector. In this perspective, according to our experience, we have listed 10 key questions we think we should ask to provide the best service in this area:
1.What is the business financing model?
The cycle of operations allows, in a timely manner, the generation of sufficient financial flows (without recourse to high financing), or rather, it is a capital-intensive business in which medium and long-term financing is required? Regarding acquisitions, in general, the more scalable the business model is, and the smaller is the volume of investment required for the development of operations, the greater will be the company attractiveness to the buyer.
2. What is the company's growth history?
These evaluation elements should take into account the company's growth history and the company’s positions in the global and local market share rankings, together with its degree of innovation - both in product and technology processes.
An accelerated growth of the company, combined with a technological innovation, is a preponderant factor of higher valuation for the investor.
3.How does the company relate to customers?
Investors value companies that maintain a regular and credible assessment process of customer satisfaction levels, following recommendations to improve the experience of its customers.
4. What is the level of dependence on customers, suppliers or employees?
A company is lower risk if it is less dependent on customers, suppliers or employees, a situation that is usually very recurrent in several sectors. In valuing this element, the most relevant is to evaluate the importance given by the company to end this dependency and how the managers have a plan to find alternatives in critical situations.
5. Is the management of the company centralized by the owner or is it exercised by independent managers?
A company with great involvement of its owner on management decisions turns out to be less attractive than a company that, in a long-term perspective, creates an independent management team. When a very involved owner leaves the company, without preparing the new leadership, usually, it becomes a crisis that must be handled very carefully.
6. How does the company manage its talents?
This question becomes relevant because, although there are less permeable sectors to innovation, more and more the development of the market requires not only the integration of skilled labor, but also the continuous updating of the knowledge of employees (technological skills and collaboration). The practice of a continuous policy of valuing and training the staff and talents is a normally a positive factor in the evaluation of the company.
7. How does the company position itself in the market?
A company that already has market control through the domain of a geographic area or a differentiated product or service has a competitive advantage over another and therefore, is more attractive to the investor. The companies that have commercial plans for expansion across borders or that are in an expanding market are also more valued.
8. What are the drivers of financial performance?
In valuing the results of financial performance indices that do not result from more efficient processes or exclusive products, it must be taken into account if there is a risk factor that results from the obsession to privilege the shareholders in a valuation vision of short-term profitability, devaluing what happens in the market and in the customers.
9. What is the business model in the cost structure of the company?
The company is more attractive when the cost of service provided tends to decrease, as fixed costs are diluted by the increase in fixed revenues. It is the typical example of companies that provide services on digital platforms that rely on periodic subscriptions.
10. Does the company adopt social responsibility procedures?
If the company adopts procedures to reduce its negative impact on the community, contributes to improving people's lives and has a socially responsible behavior, it will benefit from this strategy, gaining a better reputation, market growth and greater ability to attract talent and investors.
Therefore, rather than going through this checklist in a automate mode, the advisor's challenge is to integrate the analyzes of these different perspectives, creating a final image that reliably conveys the value that the company can generate to the potential buyer. To do this, it is necessary to know how to highlight and value essential elements, which are not always financial, but which create value and consequently contribute to the success of the company.
Victor Ladeiro, Auren Portugal partner