CEOs should be aware that when the private equity funds and investors are looking into the valuation of a shipping company, it is not always about the numbers.
A good set of appealing numbers on the profit and loss statement and balance sheet is not always the result of ethical practices.
CEOs looking to increase the value of their companies should ensure that business practices are transparent and socially responsible.
This is so that the current as well as future value will not be tarnished.
More than just numbers in valuing shipping companies
Funds and investors will perform very detailed due diligence, including on the commercial, financial and legal aspects, in order to ensure they are making a sound investment.
Usually, financial and legal due diligence are confirmatory in nature and more time and effort are spent on commercial due diligence.
This is an area where the dark factors reside that will be heavily scrutinized by the funds and investors when they are evaluating the value of the company.
If left ignored by the CEOs, these dark factors can potentially lead to diminished value, bad reputation and public relations disaster.
Dark factors refer to unethical business practices, which may not always be illegal but usually are irresponsible,, immoral, inhumane and environmentally destructive.
In the current business environment, there are a rising numbers of activist-investors and vocal socially conscious consumers.
As such, the management or mismanagement of dark factors is a crucial element that will affect a company’s valuation.
Factors affecting a shipping company’s valuation
Unethical business practices include cutting cost by using exploitative ship breaking services, reducing headcount below safe level, passing up regular maintenance and much-needed repairs, and buying cheap substandard fuel and spare parts, among others.
Besides costs, the other area to look into is the business development aspect of shipping companies.
For example, some companies, in their quest for more sales, may knowingly sign up with dubious customers, ship to countries sanctioned by the United Nations and engage in corrupted practices.
At Iran and North Korea, for instance, goods are still being shipped there despite the sanctions.
Condoning all these practices will make financial statements look good in the short-term. But these are a detriment to the valuation of the company.
Addressing the issues brings value
As shown, cost savings can be achieved either in ethical ways or unethical ways.
Funds and investors know that a number by itself on financial statements or KPI reports reveals nothing in respect to how it was achieved.
Of course, cost cutting measures are always appreciated but CEOs must be enlightened enough to know that how it is done also matters.
To address the dark factors, on the corporate front, CEOs must ensure that there is a transparent and rigorous internal audit process and a well-defined corporate social responsibility policy that is robustly adhered to.
Top management must drive this commitment and make sure that plans are fully executed.
On the operations side, CEOs should utilize the technology of Internet of Things and improved ship-to-shore connectivity to set the stage for complete operational transparency.
Applying operational transparency can quickly show not only the numbers but also the underlying actions that achieved them.
This should serve well to enhance the confidence of potential funds and investors, whose due diligence efforts would benefit from the inherent advantages of a transparent operational environment covering every aspect of the company’s business.
Funds and investors will carefully evaluate all information, objective as well as subjective, that they can obtain about the company in order to develop expectation of current and future value.
The value of a company is determined by both internal factors, which are subject to the control of management, and external factors, which are out of the control of a company.
Sometimes, the reason for the disparity in value estimates by various investors is the knowledge about key value drivers.
Make no mistakes; funds and investors are numbers driven and focused on the bottom line.
Profit margins, EBITDA, and growth all impact the value of a business.
However, objective measures aren’t the only drivers of valuation.
Subjective variables also play a role in how investors value companies because of their potential impact on the business.
More so, subjective variables like the dark factors also provide a clear understanding of the company’s full potential and what it could be worth in three to five years down the road.
At the end of the day, CEOs and other C-suite executives need to be aware about what is happening inside the company in order to take measures to protect against negative repercussions.
Kok Leong, executive editor