Enterprise value is an amount that represents the entire economic value of a company. In essence, it is a measure of the takeover price that an investor would need to pay in order to acquire a firm. Calculated by adding a corporation’s market capitalization, preferred stock and outstanding debt together and then subtracting cash and cash equivalents, enterprise value is a more accurate reflection of a company’s takeover cost than market capitalization alone.
In order to increase enterprise value says Lou Savett, managing principal of the strategic transaction services group for Gumbiner Savett Inc., it is important to position your company for future earnings growth. “The way to increase earnings is by taking a hard look at your marketplace and seeing to what extent you can expand it,” he explains.
Smart Business spoke with Savett about enterprise value, the importance of having a strong management team in place and how to best preserve the value of a business when in the selling process.
What steps can a company take to increase its enterprise value?
First of all, a company has to make a determination about where they fit in the marketplace. There are wholesalers, retailers, manufacturers and service companies, each of which has a separate group of component ingredients that make them more or less valuable. Underlying all of that is the fact that the enterprise value of a company is almost always determined by some version of discounted future cash flow. If you are able to diversify your market, if you are able to get into areas where there is less price resistance, if you are able to get into rapidly expanding marketplaces, then you are increasing enterprise value because the future cash flows will be greater than they are now. We also know that pricing multiples change with regard to the future components of the company’s vision. If you are not growing then you are unlikely to get a high multiple. If you are growing very rapidly, in a way that people believe will continue, you might get a multiple that is two or three times higher.
What is the main driver that affects the enterprise value of a business?
The main driver will always be earnings and the question will always be: What sort of future earnings will a prospective buyer be convinced can be attained? The higher this number is the better off you will be. Philosophically speaking, there are only two ways to increase a business. One way is to sell the same product to more people. The other, is to sell the same people more products. You need to do both of those things. Wells Fargo Bank, for example, recently bought an investment banking group and a national insurance brokerage company, expanding the services that they can sell to their clients.
How can a strong management team increase enterprise value?
A company needs to take a hard and sincere look at its management. Generally speaking, when we walk into a company there is usually one key person. If you ask that person, he will quickly tell you that the company is what it is because of his efforts. If you tell that to a prospective buyer the pricing multiple will be reduced nobody wants to take a chance on the genius being there forever. On the other hand, if you can say we have a management team that through thick and thin can run this company for its highest and best purposes then the amount of enterprise value goes up.
What role does enterprise value play in succession planning?
Enterprise value comes to the fore with any type of exit strategy because it accurately predicts what the person or group who is exiting will get in the way of benefits. When you do your succession planning, you want to build your enterprise value up to a certain point. For example, let’s say that your succession planning is to put together an Employee Stock Ownership Plan. Your contributions to the plan are in percentages of your capital stock, so if the enterprise value keeps going up, you put less shares in the plan and keep more for yourself. You will get a bigger bang for your buck tax wise if you continue to increase enterprise value while you’re in the midst of succession planning.
How can a business owner best preserve the value of their business when in the selling process?
We advise our clients when they’re in the selling process to bring together their core management group and get them involved in the selling process. If you don’t do that people will get scared that their job doesn’t have a future and either leave to a competitor or make other plans that aren’t in your best interest as a seller. As you move forward in the selling process it is important to determine what to tell your customers and vendors and when to tell them. All of this has to be handled very delicately. If you don’t, and something goes wrong in the selling process, you’re going to lose a lot of value.
LOU SAVETT is managing principal of the strategic transaction services group for Gumbiner Savett Inc. Reach him at (310) 828-9798 or firstname.lastname@example.org.
Encourage the flow of information. As a manager, you want to encourage information flow, and you want people to feel comfortable to reach out to you. You want to be accessible. Not everybody takes advantage of it. Just by having an open door doesn’t mean people use it.
If it’s not happening by itself, you have to go and reach out. In general, this is what they call management by wandering around, or MBWA. You’ve got to be out and about, whether it’s locally in your facilities or going on the road and meeting people.
As a leader, you really have to be everywhere. There is no substitute for seeing what’s going on in the field with customers and with your own people. All the e-mails in the world aren’t going to be able to substitute for talking to people and looking at them in the eye, and having them see you as a person they can work with and relate to.
You have to be careful, when you actually have this open-door policy and you reach out to people at any level in your organization, not to fall into the trap of becoming their micromanager. You have to do a lot of listening but very little action other than communicating whatever you want to communicate, whether it’s values or goals. You can’t really solve problems on the spot; you have to work with the management.
Maintain harmony with your managers. Clearly the only agenda for us is that the company succeeds. We live in a competitive environment.
Every customer problem can be resolved by multiple vendors. No matter how you look at it, nobody has a corner on anything in this world. So when you’re in a competitive environment where things change daily, new products emerge, customer requirements change, you really have to be totally in tune with what’s going on outside the company.
The only way for the company to succeed in a competitive environment where globalization has taken place and you are basically competing with people from all over the universe on a level playing field, is you really have to get the best out of your team. Getting the best out of your team means that you have to work in harmony with your managers and have them work in harmony with each other so that you can really get the best out of everyone.
The most important thing is to touch base, not to let a week go by without speaking with every one of your managers in great detail. That’s critical. You cannot allow any disconnect, and I’m talking about people who are across the Atlantic and wherever. It’s not just locally.
Keep people engaged. When you have people that are basically great people working for you, you want to make sure that they’re totally engaged. The only way to accomplish that is to communicate as much as possible. There are a million ways to communicate, either directly with people when you see them, through management, through what you do every day, through internal newsletters.
You have to try to paint the bigger picture. I really try to help our own people understand where we stand and how we make a difference and how we, as a company, can make a contribution to our customers and maybe to our industry, as well. It is very helpful when you are able to paint that bigger picture, because people can see where the company stands and where it’s heading.
Foster employee/customer interaction. As much as you can, you get your people involved with your customers. You want them out and about and rubbing shoulders with real customers and understanding the issues in the field and not just getting information through sales and marketing people.
We try to encourage that kind of interaction. There’s a lot to be gained on both sides. When we bring our engineers out, our customers really appreciate that because many of our competitors basically hide their engineers. The customer only gets to see support people and salespeople. When we bring our engineers out, it is really very positive and the customer feels like they’re getting value out of the relationship, and our engineers get to understand what’s going on out in the field and what real people need them to design. It’s a very nice motivator for them.
Stay a step ahead. What can cause a company to fail is lack of innovation. Ultimately, you’re only as good as your last product. So you have to constantly renew yourself and make sure you’re constantly evolving with your customers’ needs and keeping one step ahead of the competition.
The important thing is that you have smart people working for you, and you keep them motivated and make sure they see the results of their efforts.
We celebrate wins to the extent that we can. We try to propagate good news. Bad news spreads on its own; you don’t have to do anything. But with good news, you have to really try to celebrate and make people aware of what’s what and how they can emulate that kind of success.
HOW TO REACH: MRV Communications Inc., (818) 773-0900 or www.mrv.com
While nearly everyone has the occasional heartburn, if the burning sensation caused by acid in your esophagus persists, you could have GERD. The disease may be more common than you think.
Gastroesophageal reflux disease, commonly referred to as GERD, is a condition where the contents of the stomach come back up into the esophagus. The regurgitated liquid usually contains acid produced by the stomach. While your stomach is designed to handle the acid it produces, your esophagus is not.
“Between 10 percent and 15 percent of the population in the United States experiences GERD on a monthly basis,” says Dr. Mary Maish, assistant professor of surgery and surgical director of the UCLA Center for Esophageal Disorders.
Smart Business spoke with Maish about GERD, the symptoms associated with this disease and how it can be treated.
What causes GERD?
There are some known causes as well as many unknown causes. One thing that can cause GERD is a hiatal hernia, which is when part of your stomach pushes up into your chest. The esophagus extends from the neck through the chest and into the abdomen. In normal people, the stomach stays in the abdomen. For people with a hiatal hernia, the top portion of the stomach herniates, or pushes its way up into the chest, which is abnormal.
Another cause is that as we age our tissues tend to become more lax. The laxity in the diaphragmatic muscle does not provide the same sturdiness or strength that it needs to keep the stomach in the abdomen.
Also, patients that are very obese are more prone to GERD. Large amounts of fat put pressure on the stomach and can cause a hiatal hernia. Carbonated liquids, caffeine, alcohol, spicy foods and heavy fatty meals can also exacerbate reflux.
What are some of the symptoms associated with this affliction?
Heartburn occurs in about 80 percent of the patients with GERD. They may also have epigastric pain, chest pain, changes in their voice and respiratory symptoms such as recurrent bronchitis, recurrent pneumonia or a persistent cough. Other possible symptoms include ear, nose and throat issues like persistent dental caries, recurrent earaches, persistent sore throats and hoarseness. Gastrointestinal symptoms may include bloating, gassiness, nausea, vomiting and diarrhea.
How is GERD diagnosed?
There are a number of objective tests that can be used to diagnose GERD. A barium swallow allows us to not only look at how the esophagus is moving, but also helps us determine whether or not there is reflux of material from the stomach back up into the esophagus. Manometry testing consists of a small catheter placed in the nose, down the esophagus and into the stomach where it measures pressures along the esophagus. Most importantly, it measures the pressure of the lower esophageal sphincter that connects the esophagus to the stomach. If the pressure is low then we know that the patient is likely to be experiencing a lot more reflux than an average person who has normal pressure.
A pH probe test measures the total amount of acid that is dispensed over a 24-hour period of time. There are normal amounts of acid that come up from the stomach into the esophagus in every individual, but this test will measure how much acid, based on the pH, that someone is being exposed to. Finally, an endoscopy allows us to look at the lining of an esophagus and determine if there are any complications from GERD.
How is it treated?
Patients with mild GERD, or occasional reflux, are generally treated with acid inhibition medicine, or what we call proton pump inhibitors. These medicines include Prilosec, Nexium and Prevacid. It can also be treated intermittently with H2-blockers such as Pepcid, Tagamet and Zantac.
If complications persist, what surgery options are there?
If the symptoms are persistent and severe, or if there is any indication of complications from reflux then surgery can be considered. The type of surgery that we recommend is called a Nissen fundoplication. During this surgery the top part of the stomach is wrapped around the bottom part of the esophagus in order to create a new valve because the old valve is not working properly. The procedure is done laparoscopically with minimally invasive techniques and generally there is only a one- or two-day hospital stay.
DR. MARY MAISH is assistant professor of surgery and surgical director of the UCLA Center for Esophageal Disorders. Reach Esophageal Center Coordinator Rebecca Allegretto, RN, MBA, at email@example.com or (310) 825-6167 or through the Web site www.esophagealcenter.ucla.edu.
History: Hired as a salesman at the Nash Glendale dealer in 1952. Moved to Galpin in 1953. Became president in 1963, majority owner in 1964 and sole owner in 1968.
Fun fact about Galpin: Galpin Auto Sports is the custom body shop featured on the MTV show ‘Pimp My Ride.’
What is your definition of success?
First, you need to have your life in order. For me, that’s God first, family second and business third. A lot of executives get into trouble when they get those confused. You have to remind yourself to put business in the right order in your life.
What characteristics do you admire in a business leader?
Integrity and true concern for others. I don’t see it in all business leaders, unfortunately. But you find it in the way a person leads their life. One story I have is that I loan cars to some pastors in the area and I ask only one thing of them in return. I ask that if they ever hear a complaint of any kind about Galpin, to either call me or give the information to my secretary, and I’ll try to take care of the problem. If I can take care of the problem and treat people right, hopefully, they’ll want to keep doing business with me.
Boeckmann on making decisions: We work toward a consensus wherever possible. Awhile ago, we were offered a certain product, we had a couple of companies competing, we came together, looked at the presentation and came to a consensus. So wherever possible, we do that. But sometimes you need to take leadership and make a decision. I tease a little bit and tell them that this isn’t a democracy.