Why is management important when valuating a company?

February 2020 – Stefania Gaggini, Senior Analyst, KNET Project

As a business owner, manager or board member, it is vital that you understand the importance of good management and its effect on the overall value of your company.

During the lifecycle of your business, there are several situations where a company valuation will come into the mix, especially when it comes to a possible Merger or Acquisition as part of a growth strategy.

When valuing a company, understanding the quality and skills of a company’s management team is key to estimating future success and profitability.

A management team with a clear vision of the steps that must be implemented in order to take the business to the next level, significantly boosts the overall value of the company. For example:

Company A depicts great financials (it is liquid, debt is under control and the margins are healthy), yet its management lacks leadership, direction and a clear understanding of the future of the company.

On the other hand, Company B, also depicts great financials, and its management is able to successfully portray how their decisions affect the future of the business. 

Contrary to this, Company A will tend to plan investments that do not boost sales significantly. Investments which do not have an impact on profit margins and asset turnover, and investments which do not aid in the reduction of expense ratios. Hence, this type of company will be penalized, and its Enterprise Value will be negatively affected.

So, when valuating a company the management team’s overall goals and intentions will always be taken into consideration.

In part II of the series we will cover what aspects of management will add value to your company.