Mercer Capital added a new page to our website reflecting a suite of services we have been providing to private company clients for a number of years. The page, titled “Corporate Finance Consulting,” is a place where we talk to business owners, company directors, and their advisers about corporate finance for private companies. We are excited to make our experience in corporate finance consulting more visible and more available to our clients and referral sources.
Corporate Finance in 30 Minutes
Mercer Capital’s Travis Harms wrote a series of four whitepapers under the umbrella of Corporate Finance in 30 Minutes. The first paper is an introduction to corporate finance for private businesses and introduces the three key questions of corporate finance that owners of private businesses face. The subsequent whitepapers address each of these questions. If you don’t read anything else in the series, do read this first whitepaper. Per the first whitepaper, the basic corporate finance questions are:
- What is the most efficient mix of capital? In other words, is there such a thing as too little or too much debt? This question addresses the issue of capital structure for private businesses. Every business has a capital structure. The corollary question is whether it is reasonable or optimal for each business. The whitepaper addressing this question is Capital Structure in 30 Minutes.
- What capital projects merit investment? In other words, given the expectations of those providing capital to the business, how should potential capital projects be evaluated and selected? Every business has a cost of capital, or discount rate that is a function of the first question, or the mix of debt and equity on a balance sheet. The question is, do the capital investment decisions of a business achieve or exceed its cost of capital? If they don’t, then the selected investments detract from value. The whitepaper addressing this topic is Capital Budgeting in 30 Minutes.
- What mix of returns do shareholders desire? In other words, do shareholders prefer current income or capital appreciation? Do these shareholder preferences “fit” the company’s strategic position? Can these shareholder preferences be accommodated within the existing capital structure? Shareholder returns come in the form of interim returns, or dividends (from C corporations) and economic distributions (above the level of pass-through taxes) for pass-through entities. This question is addressed by a company’s dividend or distribution policy. I’ve written a good deal about dividend policy and some about capital structure on this blog. The whitepaper addressing this question is Distribution Policy in 30 Minutes.
In this series of white papers, Travis Harms makes something that can sound arcane and difficult, like corporate finance, accessible for business owners and advisers.
One More Question Regarding Private Company Value
I would suggest that there is a fourth corporate finance question for owners of private businesses. This fourth question relates to valuation. The major corporate finance texts are written primarily from the viewpoint of publicly traded companies. All public companies must address Travis’ three questions. However, they do so in the context of historical, current, and evolving knowledge of the value of their businesses through the pricing of their publicly traded shares.
Private companies do not have actively traded shares in a public forum. In order to assess value on a regular and meaningful basis, it is necessary to obtain periodic valuations. For example, one simply cannot calculate historical returns, or analyze returns in terms of interim returns and capital gains without such information. So my suggested fourth question for private company corporate finance is:
- What is the value of a private business, both historically and currently and how can we capture emerging value as we progress into the future?
The answer, of course, lies in a regular appraisal process. I jokingly say that when speaking 20 or more years ago, I suggested annual appraisals for private companies because it would be good for Mercer Capital’s business. Now, I unabashedly make the recommendation of regular appraisal because I know it is good for our clients’ businesses and their owners and directors.
If you are an owner or a director of a closely held or family business, the takeaway from this short post is that I recommend that you go to Mercer Capital’s website and take a look at the series, Corporate Finance in 30 Minutes, by Travis Harms. If the thought of reading four whitepapers is daunting, I challenge you to read the first one.
Valuation is important for business owners for many reasons. One of these reasons is for the operation of buy-sell agreements. If you are thinking about your buy-sell agreement (and you should be), then take a look at Buy-Sell Agreements for Baby Boomer Business Owners, my Kindle book on the topic.
I’ve priced it at $2.99 so you won’t have to think about the expense. So click on the image of the book. You will be taken to Amazon. Then buy the book. Don’t be mislead by the price. It is a full length book. If you like it, as most readers have, please take a few minutes and review the book on Amazon!