Part 6
What is Continuous Improvements Effect on the Value of the Company?
Income Statement
The most commonly known ‘business’ effects are impacts on operating income.
- For mature companies, operating profit is the key indicator of success.
- There are numerous studies showing how $1 invested in safety continuous improvement results in $4-6 in savings.
Valuation Multiple
This is the “multiple” applied to the operating income (or cash flow) that determines the overall value of the business.
- For example, if the multiple was 5x, then the value of the company is $5,000,000 for every $1,000,000 of operating profit.
- The multiple increases if the operating income in the future is estimated with a higher degree.
Risk
This is the level of historical or future perceived risk that the business could experience.
- Risks include incidents, stoppages of work, losses of clients, lawsuits, changes in technology and other out of the ordinary expenses.
- If risks are higher than peers, income statement may be affected (short term) and valuation multiple may be decreased (long term).
Equity Value to Owners
This is the estimated value of the company to the equity owners, assuming the company has no debt or other financial obligations.
Although it looks simplistic, a visit to your local investment banker, private equity group or potential acquirer will reveal that a significant majority of the value of your company is related to 3 key factors: what your income statement looks like, the valuation multiple range in your market and the relative risk level your company faces in your industry.
