adminmerely to preserve the value of their investment.
It follows therefore that the role of a CEO, MD, the board and indeed the owner of the company is to enhance the value of the business or company. While for many companies in Zimbabwe the immediate management preoccupation is survival, the overriding objective of value creation still remains overarching.
The tendency for many managers has been to focus on survival, which emphasises on the present at the expense of the future. Business sustainability has therefore become the biggest factor for investors wanting to invest in existing businesses.
The concept of value creation and managing for value has become very important in the current environment characterised by disposals, acquisitions, mergers, restructurings and capital raising initiatives, all of which centre around the concept of value.
This article is the first instalment in a series of articles that will be dedicated to discussion and exploration of the concept of business value. It specifically seeks to provide guidelines on how a company can build a management team that can become a source of value to the company. It also infuses guidelines on how professional business valuers can evaluate this key value driver in establishing the value of a business.
I will focus on defining company value and the possible models of measuring that value. I will also connect the topic of value to the business environment obtaining in our economy and show why such a topic has become more relevant than ever before in the Zimbabwean economy.
This part will also provide an overview of the role that management plays in a company as well as advancing the framework within which a company can evaluate the effectiveness of its management in value creation.
Part 2 will outline and discuss the main characteristic of management that is critical in value creation. The important ones that will be discussed will include the following characteristics and abilities:
l The ability of management to effectively deploy the limited and very expensive capital.
l The ability of management to more fully understand the business of the company vis-à-vis the obtaining operating environment.
l The ability to interrogate the existing business models and determine any disconnectedness with the current environment, the management disposition towards business processes, systems and controls which are very critical in fostering efficiency of operations and
l Ability to craft and at the same time implement strategies that are informed by the value creation strategic objective.
To begin with, let us put the concept of “business value” into perspective by considering the definition of business value and how the concept is relevant to the current Zimbabwean environment, including the methods that are employed to determine such value.
Business value can be described as the amount a business is worth to a stakeholder or any other interested party who can include a potential investor or a potential provider of finance for the business.
There are a number of reasons why the determination of the value of a business and the consideration of management in value creation has become important in the Zimbabwean business landscape.
As businesses seek to recapitalise, there is need to consider invitation of equity partners. Some companies have adopted strategic initiatives that include mergers, demergers and restructuring as a way of creating the needed competitive advantages. Still, a number of companies have opted for debt to finance their operations. All these activities invariably require determination of the value of a business in one form or another.
There are various methods of determining the value of a business to a point where it is generally agreed that there is no one correct method. What method will be used will depend on a number of factors that include but are not limited to:
l the reasons for valuing the company;
l the nature of the business of the company being valued and its business model;
l the stage of the company in its business cycle and the availability or non-availability if the information critical to applying a certain valuation method.
Some of the more common valuation methods include the discounted cash flow, earnings-based methods, and the net asset-based method. In practice, it is not uncommon for all the valuation methods to be used as adjuncts to the method determined as most appropriate.
Where no one “most appropriate” method is identified, an average of the results of all the methods used can be taken as the value. Where the methods produce very varied results, any range of values between the highest and lowest value determined by any two of the “most appropriate” methods will provide a basis for negotiation in arriving at the final settlement amount.
Zimbabwean businesses are faced with a number of challenges with a lot of them, sadly, being attributed to the nature and calibre of management running these organisations. Today we still have a section of management that is still stuck in the pre-2009 era of super profits and disregard for the basic tenets of customer care.
More so, many companies today are run by management that is self-serving, leading to unprecedented levels of corporate corruption and fraud ever to be recorded in Zimbabwean corporate history.
Many companies today are being exposed to sustained corrupt practices that are not only restricted to lower level management, but to the senior executives and in some instances, to the boards.
There is now a strong opinion gaining credence that many corporate failures being experienced in Zimbabwe are not because of the harsh economic environment or the liquidity crunch, but because of corruption, fraud, mismanagement of company resources, including capital injected and debt borrowed, and boards’ ineffectiveness and management ineptitude in dealing with the challenges at hand.
In the creation of value, management is considered the most critical “key value driver”. Christopher A. Bartlet and Sumantra Ghoshal consider human capital as the starting point for any successful and sustainable strategy of any company. Any company that seeks to develop competency driven strategies will acknowledge that people are the cornerstones of such strategies.
Even Warren Buffet, the billionaire investor and co-owner of Berkshire, supports the critical role of management in value creation as seen from some of his telling statements.
He once said: “Of all our activities at Berkshire, the most exhilarating for Charlie Munger (Buffet’s investing partner) and me is the acquisition of a business with excellent economic characteristics and a management that we like, trust and admire.”
In another quote, he had this to say about evaluating the risk of an investment: “The certainty with which management can be evaluated, both as to its ability to realise the full potential of the business and to wisely employ its cash flows . . .” and “ . . . the certainty with which management can be counted on to channel the reward from the business to the shareholders rather than to itself” are very critical factors in evaluating the potential of an investment.
In the final analysis, there is credence for management to focus on managing for value in trying to resolve some of the challenges affecting our businesses today. There is no doubt about the management’s critical role as a key value driver. The need to put together a strong and effective management team is now an imperative for every company.
Rabiro Mangena is a corporate finance and business consultant with BDO Tax & Advisory Services, the consulting arm of BDO Chartered Accountants. He writes in his own personal capacity. Send feedback to [email protected] or call on 703876.
Online Reporter