Today’s uncertain economic environment presents unique challenges for companies looking to increase business value. And enterprise value is crucial—especially today—even if you’re not considering making a business transition soon.
Maintaining a strong business valuation can make it easier for you to appeal to investors, shareholders, and lenders for additional capital—something that’s more challenging and costlier in today’s environment of elevated inflation and interest rates.
“From a traditional corporate perspective, in terms of funding operations, leaders are looking at higher costs and margin squeeze,” says John Pilant, head of Industrials & Services Corporate and Investment Banking at Truist Securities. “From a broader mergers and acquisitions (M&A) perspective, it’s harder to fund deals.”
Accessing extra capital can help on both fronts. It can also help you continue to move forward with plans for digital transformation, customer experience upgrades, and other innovations that will help you maintain a competitive advantage when others are holding steady or cutting back. Those improvements, in turn, can allow you to infuse added value into your goods or services, enabling you to lift prices.
The problem with today
“In times like this, people always try to look at the past to predict the future,” says Pilant. “But that’s difficult to do because the conditions are so different from anything we’ve seen historically.”
Factors such as lingering supply chain issues, regulatory uncertainty, and geopolitical tensions (from the war in Ukraine to the 2024 presidential election) are adding an extra layer of complexity to today’s elevated inflation and interest rates.
“I see clients trying to be both offensive and defensive in terms of how they’re approaching their business,” says Pilant. “They’re trying to be prepared for the worst while keeping an open mind on finding ways to pick up market share.”
One way to do that is to learn to think more like an investor or shareholder.
How to increase enterprise value during uncertainty
Pilant says that part of his job is advising companies on how an investor might view the performance of their business—and how making the right moves can increase their company’s value in investors’ eyes.
“Anything that can be done to protect margins and protect your market share—that’s certainly something investors are focused on,” says Pilant.
Here are some tactics Truist experts have been talking about with clients:
1. Make M&A deals that would impress investors.
Thanks to elevated interest rates, the cost of debt is higher than it’s been in years. That makes funding an acquisition costly. For a company to realize a solid return on their investment, it’s important to think strategically and look for ways to create synergies with your target, says Pilant.
“Investors are applauding when an M&A deal is announced that happens to be very strategic,” says Pilant. “If you look historically at those deals done in times of uncertainty, they often perform the best. And when they succeed, that’s because they were done carefully and strategically—not haphazardly.”
For example, say you have an opportunity to acquire a company with a big footprint in a product area where you have a smaller market share—and you already have an existing distribution channel to bring it to market. That merger can be a smart move.
However, it may not be a good time to add a wholly new line of business just because a company is within your price range. Pilant says that type of deal takes a lot of work to make accretive. Investors prefer you engage in deals where you’re highly likely to see your earnings per share increase after signing—and the sooner, the better.
2. Divest when necessary—including recent ventures.
In an uncertain economy, a smart way to strengthen your business—and in turn increase its value—can be to streamline what you already have.
Patrick Stevens, head of Healthcare Corporate and Investment Banking at Truist Securities, says he’s seeing more and more owners taking a critical look at their companies to determine which parts are core to the business and which aren’t.
“We’re seeing more corporate divestitures of non-core assets with the cash proceeds being redeployed back into core operations,” says Stevens. “In some cases, it’s necessary to consider taking one step back to take two steps forward.”
This includes lines of business or new products that companies may have explored during the past few years to stay afloat during the pandemic. Times have changed and will continue to change, so don’t be afraid to cut your losses and pivot again today.
3. Consider risk mitigation strategies—such as onshoring.
Another important part of building your company’s value? Protecting it from risks that could impact your operations. And many of today’s risks are unlike any we’ve seen in the past—from lingering supply chain issues to geopolitical tensions.
Such emerging issues can change the risk profile of businesses and how they’re valued. One risk avoidance tactic Pilant says he sees a lot today is onshoring—bringing operations back to North America, whether that’s Mexico, Canada, or the United States.
“The main reason companies consider onshoring is to make sure their supply chain is secure in the face of today’s potential risks, whether they’re geopolitical, macro, or another COVID-19 situation,” says Pilant. “They want to make sure they have access to the materials they need.”
“Our clients are smart people who know their industry and business incredibly well. Where we can help is answering questions like, ‘How will investors think about this move?’ We add value by providing leaders with perspectives they don’t traffic in every day.”
Head of Industrials & Services Corporate and Investment Banking, Truist Securities
Talk to your Truist relationship manager about other ways operational risks have changed, and find out what strategies and insurance solutions can be protective.
4. Seek diverse perspectives—before you need them.
In a volatile environment like today’s, it’s important to identify—and mitigate—risks before they can negatively affect the value of your business. Having a smart team of advisors to lean on when things get turbulent can be a huge advantage. Pilant urges companies to leverage the expertise of advisors now rather than later.
“Most companies are not in terrible shape, but they’re looking at the clouds forming and saying, ‘I need to be worried, but so far things are pretty good. So, how do I think about this?’” says Pilant.
He adds that having trusted advisors who can synthesize all the complexities of today’s environment and articulate the risks to a specific industry or sector is critically important. With Truist, companies have access to experts from across the firm for an approach that fits their unique needs.
“Our clients are smart people who know their industry and business incredibly well. Where we can help is answering questions like, ‘How will investors think about this move?’ and ‘How will the capital markets think about it?’” says Pilant. “We add value by providing leaders with perspectives they don’t traffic in every day.”