What Drives Value in an Investment Firm?

We recently held our annual investment industry update which covered a host of topics including the latest updates on GIPS, the SEC Marketing Rule, fair value guidance, taxes, and compliance. The event also included a discussion on valuation drivers in an investment firm. Jennifer Kreischer, M&A Advisory Consultant for Kreischer Miller’s Investment Industry Group, provided insights into the key levers that investment firms can use to drive value in their businesses.

Value determination is a critical aspect of any business, as it plays an essential role in making strategic decisions, be it in the context of a business transaction, succession planning, or growth financing. Understanding the value of a business is imperative for any owner or investor to make well-informed decisions and ensure that they are getting a fair deal.

In the context of business transactions, it is essential to be prepared for unsolicited offers, even if an owner is not actively planning to sell or buy the business. Having a well-established business value can help an owner be better prepared for negotiations. Value determination is also crucial in succession planning. Without proper planning, the options available for transitioning ownership of the business may be limited, and the value of those options may be lower. Understanding the value of the business can help the owner make more informed decisions about the best course of action for their business. Additionally, value determination is critical for growth financing, as banks and other financial institutions use it to assess the risk of lending to a business and to determine the loan amount they are willing to provide.

The main objective of value determination is to protect the interests of the business owners and help new investors to assess the opportunity to invest in the business. It also helps business owners evaluate whether they are ready to bring in new partners or promote team members to ownership positions. One way to think about it is that it helps potential partners determine whether they would be in a position to borrow money to buy into the firm and how long it would take them to pay back that loan based on the company’s cash flow.

The concept of the multiplier effect, which refers to the impact of certain value drivers on the value of a business, is also crucial. These value drivers can include factors such as revenue growth, profitability, and risk management. By understanding and focusing on these key value drivers, business owners can improve their options for succession and increase the value of their business. Earnings multiples are a better proxy for a discounted cash flow valuation. By increasing earnings and positioning the business to command multiples at the higher end of the range, the value of the business increases.

Value determination is a critical aspect of any business and plays a vital role in making strategic decisions. By understanding your business value, owners and investors can make more informed decisions and ensure that they are getting the best possible price for the business.

We invite you to watch the rebroadcast of Jennifer Kreischer’s full presentation here. If you have any questions about investment firm value drivers or would like to discuss your firm’s needs, please contact Kreischer Miller’s Investment Industry Group.

 

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