Warehouse Owner Talking to Businesswoman

A whole new set of challenges emerge in the mature phase of a business. An accurate valuation provides a good starting point for planning your next steps.

Preparing for transition

Valuation of a Mature Company Can Uncover Important Issues

  • Nathan DiNatale
  • 10/24/2019

After closely held companies have successfully survived the rigors of the startup and growth phases, they tend to settle into a more stable phase. In the mature phase, revenue growth is approaching the rates appropriate for the economic conditions or industry. A well-established management team — frequently made up of family members — is in place. Most importantly, mature companies can rely on a substantial operating history. Yet, very few owners truly understand the value of their company, which makes it difficult to develop a strategy and make informed management decisions about the future.

Valuation of a mature company

While valuing a mature company may appear less complicated than valuing a company in its earlier phases, it is important to consider certain factors unique to this phase. For example, if the company manages earnings based on historical performance, is it missing out on the true earning potential of assets? Excess assets, underutilization, and outdated equipment are big issues for generational businesses, especially when it comes to changes in manufacturing technology. All these issues should be analyzed to understand the company’s operations and true income-generating potential.

Valuation Business Life Cycle web

Reinvestment and succession

As companies mature, reinvestment needs may decline, and the use of cash and financing capabilities can become more important, especially if a transition of ownership is on the horizon. The mature phase of a business prompts a whole new set of challenges and questions. How owners answer the questions will influence the next phase of the life cycle. For instance:

  • How is management handling the build-up of cash over time?
  • Are leaders using cash to finance operations?
  • Are they making the most of shareholder returns?

The use of long-term debt can add substantial value to a business over the long-term and provide a vehicle for shareholder returns. However, the risk associated with additional debt should also be balanced in some way.

In the mature phase, owners should have a strong sense of what their company is worth, because it is in this phase when strategic decisions about the future will need to be made. Whether that future will be a sale or a transition to a new owner, a clear understanding of the value will help guide the expectations of all parties involved.

A case study in understanding the value of your life’s work

We recently advised the leaders of a large privately held, fourth generation family farm and canning business to help them understand the true value of their most valuable asset, the business. The company had historically used its book value to calculate the annual share price. While this may be appropriate for a holding company, it does not address the company’s earnings. CLA was able to collaborate with management and educate the leaders about the treatment of certain non-operating assets, such as real property and excess inventory.

During the financial analysis and management interviews, CLA learned that the company maintained an enormous amount of specially processed fresh inventory to safeguard against weather events that could destroy crops. While this decision was made to maintain the quality and future availability of their product, it also created excess inventory in comparison to competitors and the industry.

Through that same exploration process, we also identified a large discrepancy in the fair market value and net book value of the company’s real estate holdings, which also contributed to an increase in value.

While these non-operating assets were required in the business, including the excess assets in the valuation substantially increased the overall fair market value of the company. CLA was able to demonstrate to management that using book value significantly undervalues an ongoing operating company with positive earnings. In addition, we considered the applicable discounts for lack of marketability and control for minority shareholders, which resulted in a significant downward change in the common stock per share price.

How we can help

CLA uses a thoughtful, objective, industry-focused approach to help you discover opportunities. We take the time to understand your company’s operations, history, and earnings performance, so we can provide a realistic valuation and financial information that can facilitate sound management decisions. Through the valuation process, you can explore a variety of ways to help build the value of your operation. From taxes to succession planning, the depth of our experience and the breadth of services can provide all the resources you need in one place.