Sell or Hold?

1854_gold_dollar_obvEvery telecom business ought to periodically ask the question of whether it should stay with the business or sell. Asking this question prompts you to take a measure of your business and to think about the future. One of the best tools to measure your performance is to periodically get a valuation. I recommend a valuation every three years. This gives enough separation in time to understand if the business is gaining or losing value over time.

A good valuation is going to be detailed enough to dig into the details and will find the real value to a buyer. Telecom valuations are no longer done on value per customer. Instead a buyer will offer a multiple of the cash flow that they will inherit after a purchase. A well-prepared valuation is going to start with your books and ledgers and will make adjustments to reflect the actual cash flow a buyer will see if they bought your company.

There are almost always expenses that would disappear if a company was sold. For example, there might be higher than normal salaries paid to owners in lieu of paying dividends. There might be benefits for executives that wouldn’t be paid by the new company. There might be company cars or other assets that won’t convey to the new buyer. There might be employees that are not expected to be retained by a buyer. In an actual sale the seller would want to acknowledge these sorts of adjustments, and so they should be reflected in a valuation.

One must also consider normalizing revenues. It’s not unusual these days to sell services on a long-term contract that have up-front payments. So if you sell things like transport to a cellular tower but only get such revenue in the years when the contract renews you need to adjust to show that as annual revenue at the appropriate level.

Getting a good valuation is only a start to looking at your business. A valuation will tell you about the overall health of a business, but it doesn’t tell you how to make your business worth more in the future. So along with a valuation I also highly recommend that you look periodically into the future to see where the business is headed. Take a look at the services you are selling today and see if those same revenues will be around in the future. For example, if you count a lot on cable TV or voice revenues you must consider that the customers from both of those products are disappearing each year.

I call this process of looking into the future a strategic review. You need to periodically take hard look at your business and ask yourself if you are doing the right things. Are you staffed right? Are you selling the right products? Are you marketing right? Should you outsource things done internally or bring external functions in-house?

It’s not always easy to look at your business critically and you ought to consider bringing in some outside advice to get a fresh set of eyes looking at your business. You can do this by hiring a consultant like me, and I regularly help companies take a hard look at themselves. But you can also get this advice elsewhere. You might know somebody who runs a telecom company that you know and trust who could give you the same look. But what you want is somebody who will ask the hard questions and who will challenge the assumptions that you take for granted. It’s very easy in a telecom business to get stuck thinking that the status quo will never change, but you don’t want to look up some day and see that you have lost a lot of margin and value and didn’t take steps to avoid it.

Finally, the really critical step is to use the information you learn. If your business is not meeting the goals you set for it, in terms of generating cash flow or growing in value, then you must decide what steps need to be taken to meet your goals. A valuation is a tool and not an end to itself. Only undertake valuation and a strategic review if you intend to learn from the process and are willing to deal with whatever you learn during the process.

2 thoughts on “Sell or Hold?

    • Dear Doug:
      Probably the best, most recent example of this sort of assessment is the recent sale of the Washington Post Company (just the newspaper side of the business…) to Jeff Bezos by the Graham family. The Grahams had been owners of the paper for three- and four generations, and Don Graham — generation number three — essentially decided that they could run it into the ground or bring in someone with a fresh new outlook that might save the paper… Interesting story… of course it all played out in the pages of the newspaper (… right around the time that Nancy and I decided we did not need to keep getting the daily paper, and only receive the Sunday edition!).


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