K.White book

Innovation for Business: a 21st Century Development Model for Russia

Part XVI

In my last 2010 posting I used the example of a Siberian cosmetics company we had once worked with to show how a shrewd approach to loan and equity planning could help boost the value of your company. Lets tick off the steps we took to achieve success.

In a nutshell The owner of the company thought that, using his assumptions, he would grow his entity to a $200m company within five years with just a $5m loan.

In fact, that proved to be inaccurate and undoable because the firm was under-investing in itself; there was not enough cash flow to invest in development. None of the CEOs objectives would have been achievable had he proceeded on his original plan.

We provided three separate scenarios, including (i) our own appraisal of the owners business plan and our assessments of (ii) what if the company raised $10m in new equity and (iii) what if the company raised $20m in new equity.

From the assessments it was crystal-clear that the company could grow its value and the owner of the company could reach his personal objectives of having a shareholding of about $200m, if he followed our advice.

Running your companies by the numbers

What is the key lesson of this example?

You may own 100% of a company that is worth $50m, or you can dilute yourself, bring in new investors, pursue different strategies, invest in modernization, R&D and innovation; and by ceding about 30% of your shareholding you increase the value of what you still own from the original $50m to $200m.

And at that level your company may be primed to go to the Russian or international stock market.

What other lessons does this teach? Once the CEO and his managers agreed to speak this language, they could then form a real dialog with investors.

If youre not in a position to speak to investors in such a way that you understand the internal rate of return, the investments required; if you cant understand the financial mechanisms of how to value your company under different scenarios and analyze what if inflation is 10% vs. 15% vs. 6%, you wont be able to choose different financing mechanisms to run your company more efficiently and insert working capital in your company.

You need a mechanism in which to manage the company. The financial modeling mechanism is exactly used for the purpose of helping a CEO adjust his strategy day by day, month by month, year by year.

With it you have a roadmap; youll be able to open a dialog with the investor and avoid conflicts of interest. If you and the investor are working on the board level with this strategy and some force-majeure situation happens, no one can claim any conflict of interest. You will simply react as professional business managers to changes by adjusting financial numbers and investment rates.

If your management is not achieving the numbers, you identify with red flags what areas of management are not working: quality control or production, the finance department or the manufacturing department, or maybe the sales department.

You will really begin to run your company by the numbers, and thats our objective. We want to explain to you as owners of companies that if you run your companies by the numbers you will see that investing in innovation and modernization will not only help your company succeedit will grow the value of your company and your shareholding in that company.

14 Jan '11

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