Business valuation is not all about the figures in the financial statements as many people erroneously think. My many years of experience in business analysis has taught me that it is some times more important to look out for qualities of a good company while at the same time applying proven business valuation techniques.
In this article on qualities of a good company, I will be discussing those traits that any investor (potential or current) should always look out for when it comes to making investment choices. The qualities of a good business will be discussed under Seven broad headings with subheadings,
Seven (7) Business Valuation Aspects
The first thing that I look out for when considering a company in order to determine if it is a good investment or not is the efficiency at which they do things. A company that is trying so hard to reinvent the wheel may not get the nod from me for example. I explore this efficiency parameter from the following five qualities of a good company parameters.
- Technology: to be considered a good company, there must be noticeable and impactful evidence that the business is fully leveraging on technology. I do not necessarily expect the company to blindly and sheepishly follow any gizmo buzz word that comes out of the business technology ecosystem. But I expect to see implantation of baseline technologies like the use of some sort of ERP application and some level of business process automation. The efficiency level of a business that still uses Microsoft excel spreadsheet to compute PAYE and payroll cannot be the same as a company that uses full-fledged accounting software perform same tasks.
- People: Human link they say is the weakest link in any meaningful endeavour. Putting the wrong people in charge of the right action will simply produce the wrong output. When valuing a business, look closely at the people factors. Many clues that can help you understand the kind of people managing a company are littered in the financial statement of the entity. Having the wrong people will always lead to inefficiencies and excuses.
- Process: there are three vital components that make up a system. Process is one of them while technology and people are the other two important components of a system. The presence of a process that works means that there is and would be basis for any form of scalability and expansion in the company.
- Culture: everything that defines a company is directly tied into its culture. Culture defines and dictates the working atmosphere. A business with a culture of taking workplace security very seriously for example will attract and retain top notch talent for example.
- Innovation: innovative and creative thinking are what adds real value to anything that we do. A company that lacks innovative thinkers really struggle. Most business turnaround experts will tell you that the single most important quality they look out for while considering a business revival strategy is the level of innovation that the business or company can boast of.
Mission and vision
The mission and vision of any entity is the jetpack that powers and directs the organization’s trajectory to the land of achievers. The objectives, goals and strategies of a company are made clearer when designed through the lenses of the mission and vision statement.
- Plan: there is no human being that does not make plans for the future. The only difference is that those that make their planning intentional archives the desired result while those that plan unintentionally achieve undesirable result. Through proper planning, relevant probing questions designed to expose any undesired outcome. I always look for a company’s medium to long term planning data while screening companies for possible investment opportunity.
- Execution tenacity: strategy without execution is nothing but a complete bottleneck. What is the point of committing resources into setting up strategies if they will not be tenaciously executed? Strategies must be clear and properly communicated to all employees of an organization for it to stand a chance of being executed.
- Leadership: the kind of leaders that manages the affairs of a going concern plays significant role in shaping the future of the organization. Data driven leaders for example stand better chance of succeeding in complex project than leaders without vision that is backed by data.
- ESG footprint: being environmentally conscious and making green investment decision is no longer a nice to have kind of thing. Really good companies have a clear ESG blueprint. ESG stands for Environment Social Governance
Stakeholders relationship sends very visible signal about the intrinsic value of a business. The problem is that not very many people have the required skill in this aspect of business valuation. How an entity treats its users of accounting information for example summarizes all of the organizations’ business communication policy. Stakeholders relationships analysis as a way of examining the qualities of a good company are further discussed in the following sections.
- Customer service: Any business that is not customer centric in this day and age is worthless regardless of what any other indicator may be saying at the moment. Customer service is the oil that constantly lubricates the economic activities of a business so as to avoid friction that will eventually lead to complete halt in all business activities. Customers are arguably the most important stakeholder in modern businesses therefore, keeping customers happy is a quality that separates average companies from good and thriving companies.
- Human resource management: a company with rubber stamp HR department can never be a good company.
- Government agency relations: is the company in the black book of any government agency? Have they defaulted in paying their taxes or been in the news for the wrong tax reasons? Inappropriate use of transfer pricing for tax planning purpose is also a factor to consider.
- Investor relations: for companies that already have investors, check the quality and quantity of the information that is at their disposal.
- Creditors and creditors: what are their creditors and debtors saying about the organization. Is the company over squeezing their debtor and creditors all in the name of optimizing working capital?
- Vendors: will the vendors of a company proudly showcase them as their business associate in a fair?
Social media footprint
Take it or not, social media now give out a lot more information about a company that a lot of people can imagine. Things like simply asking questions on www.quora.com will provide you more insight that you needed about the true values of a business.
Transparency of reporting
Financial statement and accounting fraud has been and will the hallmark of a bad business. Part of the functions of management is to prepare transparent financial statements of an entity but how many organizations really do prepare financial statement that fairly represents the true state of affairs? The quality of earnings is a book that I strongly recommended that all aspiring investors must read.
No meaningful business valuation exercise can be concluded without thoroughly reviewing the risk landscape of the company in question. Risk assessment when done correctly uncovers some potential dangers that no one may have thought of.
Sustainability of Business model
A lot of people in business don’t know how to design a profitable business model that can stand the test of time. A simple yet powerful question to ask here is ‘is the business model of this organization solving problems and yet difficult to copy?’ If the answer to this question in a No, it simply means that business model of the entity that you intend to invest in is not sustainable.