Continued from last week
IN these tumultuous times even quoted companies need to have a view of what their companies are worth given that the stock market is not delivering fair value assessments.
The stock market prices will simply tell you what willing buyers and willing sellers are prepared to pay for shares. These transactions are not necessarily driven by value considerations but could be motivated by circumstances that force sellers to sell at below value. In most cases, the sellers may simply not be aware of the real value of their investment and will sell at any price!
What is astounding now is the current prices on the stock market which are not linked to anything at all. On average, prices are about a 10th of the net asset values of the companies. What a bargain!
Irrespective of this, because most investors do not have a view of the value of their investments they go to sell their shares at these paltry prices.
At such times, as these, even boards of listed companies need to actively come to a position where they assist their shareholders by getting independent values of their companies.
This will then assist smaller investors in making decisions on how best to value the companies. Most boards have a gut feel that their companies are undervalued; they are however not bold enough to assign a realistic value they can ascribe to their companies.
Buying and selling transactions
In broad simple terms, the value of a company is the present value of all its future earnings streams into perpetuity. Naturally where the company has great prospects and is doing well, this value will be multiples of the assets in the company. When buying the company in question, one therefore needs to avoid emotional decisions where the value is way too high for the underlying assets. Your financial advisor will need to advise you on making the right decision.
Unquoted shares held in families
Most middle-income families will have small to medium enterprises that thrive during the life of the sole shareholder, normally the father. It is sad though that when the breadwinner dies most families relinquish control of these businesses for paltry sums because they do not get advice on how to value the small fortunes often embedded in the business.
Again, it is important that whenever one inherits a business, they get it valued early so that they can make informed decisions when disposing or repackaging the inheritance. Better still, the founder needs to engage an evaluator to give them a view on the value of the business before they die. This may even assist them in executing their wills upon realising the value of their investment.
This is particularly important for unquoted companies as there is no ready market for their shares unlike an investment that is quoted on the stock market.
Ultimately valuation is a derivative of the concept of value or wealth or worth. The value of a company is directly related to the extraction of worth from the underlying assets. The same company can have different uses to different stakeholders and therefore different values to each.
For some the value of the company lies in the platform existing to embark on the next generation product or R&D opportunities of an existing product line; remember Coca-Cola.
For others, the value can be extracted from the same company via a merger with another entity where potential synergies can be exploited; remember Kingdom Meikles Ltd. For others the value lies in the potential for demerging the company into separate entities with individual sum totals greater than the original single entity. Remember Zimsun and Dawn Properties.
Inasmuch as we say beauty is in the eye of the beholder, perhaps we can say value is in the eye of the shareholder. What are you planning for your company? At this time of the year strategic direction must have already been defined for your company.
And that direction must be a means of extracting or unlocking value. Now you cannot possibly derive meaning from your value extraction operations without knowing the actual value of your, company at the moment. Valuation is a strategic issue.
You need to know at any point in time what your company is worth. Perhaps 120 years from now your company will be the case study of how a great opportunity was undertaken at a great time and immense value created; or perhaps a classic case of how value was thrown away at the brink of success. Only you can decide.
Your company is jewel. For shareholder â€” planning, it is key that one has a value of what the company is worth.
BY KENIAS MAFUKIDZE