What Exactly Is Your Company Worth? (Understanding and Valuing Stakeholders in Business Success)

The question of what companies (or derivatively, shares in companies) are worth has always been fascinating to me. I am on a journey to discover the best position to take on the subject and will share my learnings along the way. On this journey, I will consume resources (books, podcasts, videos...) and talk to business leaders to get their take on various subjects around leading a successful business.

A few years ago, I completed the iMBA with The 12-Week MBA by Abilitie . The release of the book ‘12-week MBA’ by Bjorn Billhardt (CEO, Abilitie) and Nathan Kracklauer re-sparked my quest on the matter of estimating company value.? Billhardt and Kracklauer propose that the value of a business (from a shareholder perspective) originates in discounted future net cash flows. But what does that mean? Well, you’ll have to read the book but I’ll do my best in this piece to tell you what I understand by it and how it ties into another conversation I had with Olufisayo Okunsanya who suggests quite surprisingly that ‘Love’ is at the centre of running a good business.

Understanding and Caring for Company Stakeholders

Doing business today requires a keen understanding of your stakeholders. First of all, who are they? Customers, shareholders? Yes, both and more. Stakeholders include employees, suppliers and communities (online and offline). Understanding and valuing stakeholders is paramount to a company’s success in the modern business landscape. This will enhance your company’s reputation and profitability and lead to more favourable assessment of long-term value creation i.e. an estimation by your stakeholders of how well your company will do in the future. Companies like Starbucks and Amazon do a laudable job of understanding their audience, and we’ll discuss here a bit about the importance of caring for and understanding stakeholders, the subjective nature of a company's value, and the origination of shareholder value from a company's discounted future net cash flows.

1. The Importance of Caring for and Understanding Stakeholders

A good business must care deeply about and understand its stakeholders, including customers. Stakeholder theory, as proposed by R. Edward Freeman, emphasises that companies should create value for all stakeholders, including employees, suppliers, communities - not just shareholders. Taking this approach can lead to a more sustainable and ethical business model. More so, you cannot provide value for people you don’t understand. This is what Okunsanya means when he encourages us to “lead a company with love”. So let’s consider some of those stakeholders:

Customers: The modern consumer is well-informed and values transparency and corporate responsibility. A company that listens to its customers and adapts its products and services to meet their needs can build a loyal customer base. For example, the success of Apple Inc, voted for the 10th year in a row for Marketing Excellence, is largely attributed to its deep understanding of customer needs and its commitment to innovation and quality.

Employees: Companies that invest in their employees by providing a positive work environment, opportunities for growth, and fair compensation can benefit from higher productivity and lower turnover rates. Google's emphasis on employee satisfaction has been said to boost its bottom line. Though recent developments in the tech space may suggest otherwise - but that’s a conversation for another day.

Suppliers: Building strong relationships with suppliers can ensure a reliable supply chain and better pricing. Companies like Toyota have excelled by fostering close relationships with their suppliers, resulting in high-quality products and efficient production processes.

Communities: Engaging with and supporting local communities can enhance a company's reputation and lead to a more supportive business environment. Starbucks, for example, invests in local communities through various initiatives, enhancing its brand image and customer loyalty.

Shareholders: These are the most obvious stakeholders. Technically the “owners” of the company and often primary stakeholders. Sustainable shareholder value is achieved by balancing the interests of all stakeholders, ensuring long-term profitability and stability. It is important to maximize shareholder value, without sacrificing other stakeholder interests.?

2. The Value of a Company: Subjective Perspectives of Buyers and Sellers

The value of a company is in the eye of the beholder. The beholder is sometimes the buyer and other times, the seller and the company value sits where their value 'venn diagrams' intersect. Basically, company value is subjective and the several factors like market conditions, financial performance, and future potential can determine that value.

Buyer's Perspective: Buyers, whether they are investors or acquirers, assess the value of a comThe question of what companies (or derivatively, shares in companies) are worth has always been fascinating to me. I am on a journey to discover the best position to take on the subject and will share my learnings along the way. On this journey, I will consume resources (books, podcasts, videos...) and talk to business leaders to get their take on various subjects around leading a successful business.

A few years ago, I completed the iMBA with The 12-Week MBA by Abilitie . The release of the book ‘12-week MBA’ by Bjorn Billhardt (CEO, Abilitie) and Nathan Kracklauer re-sparked my quest on the matter of estimating company value.? Billhardt and Kracklauer propose that the value of a business (from a shareholder perspective) originates in discounted future net cash flows. But what does that mean? Well, you’ll have to read the book but I’ll do my best in this piece to tell you what I understand by it and how it ties into another conversation I had with Olufisayo Okunsanya who suggests quite surprisingly that ‘Love’ is at the centre of running a good business.

Understanding and Caring for Company Stakeholders

Doing business today requires a keen understanding of your stakeholders. First of all, who are they? Customers, shareholders? Yes, both and more. Stakeholders include employees, suppliers and communities (online and offline). Understanding and valuing stakeholders is paramount to a company’s success in the modern business landscape. This will enhance your company’s reputation and profitability and lead to more favourable assessment of long-term value creation i.e. an estimation by your stakeholders of how well your company will do in the future. Companies like Starbucks and Amazon do a laudable job of understanding their audience, and we’ll discuss here a bit about the importance of caring for and understanding stakeholders, the subjective nature of a company's value, and the origination of shareholder value from a company's discounted future net cash flows.

1. The Importance of Caring for and Understanding Stakeholders

A good business must care deeply about and understand its stakeholders, including customers. Stakeholder theory, as proposed by R. Edward Freeman, emphasises that companies should create value for all stakeholders, including employees, suppliers, communities - not just shareholders. Taking this approach can lead to a more sustainable and ethical business model. More so, you cannot provide value for people you don’t understand. This is what Okunsanya means when he encourages us to “lead a company with love”. So let’s consider some of those stakeholders:

Customers: The modern consumer is well-informed and values transparency and corporate responsibility. A company that listens to its customers and adapts its products and services to meet their needs can build a loyal customer base. For example, the success of Apple Inc, voted for the 10th year in a row for Marketing Excellence, is largely attributed to its deep understanding of customer needs and its commitment to innovation and quality.

Employees: Companies that invest in their employees by providing a positive work environment, opportunities for growth, and fair compensation can benefit from higher productivity and lower turnover rates. Google's emphasis on employee satisfaction has been said to boost its bottom line. Though recent developments in the tech space may suggest otherwise - but that’s a conversation for another day.

Suppliers: Building strong relationships with suppliers can ensure a reliable supply chain and better pricing. Companies like Toyota have excelled by fostering close relationships with their suppliers, resulting in high-quality products and efficient production processes.

Communities: Engaging with and supporting local communities can enhance a company's reputation and lead to a more supportive business environment. Starbucks, for example, invests in local communities through various initiatives, enhancing its brand image and customer loyalty.

Shareholders: These are the most obvious stakeholders. Technically the “owners” of the company and often primary stakeholders. Sustainable shareholder value is achieved by balancing the interests of all stakeholders, ensuring long-term profitability and stability. It is important to maximize shareholder value, without sacrificing other stakeholder interests.?

2. The Value of a Company: Subjective Perspectives of Buyers and Sellers

The value of a company is in the eye of the beholder. The beholder is sometimes the buyer and other times, the seller and the company value sits where their value 'venn diagrams' intersect. Basically, company value is subjective and several factors like market conditions, financial performance, and future potential can determine that value.

Buyer's Perspective: Buyers, whether they are investors or acquirers, assess the value of a company based on their objectives and expectations. The typical distinction is made between financial buyers and strategic buyers. For instance, a private equity firm may value a company based on its potential for operational improvements and eventual resale, whereas a strategic buyer might focus on synergies and long-term integration benefits. This subjectivity is evident in market dynamics where stock prices fluctuate based on investor sentiment and external factors.

Seller's Perspective: Sellers, including company owners and existing shareholders, value their business based on historical performance, intrinsic value, and emotional attachment. For example, founders often have a higher valuation of their business due to the time and effort invested. You may have come across this during the dreaded 'valuation conversations' with many tech startups during acquisition negotiations.

The interplay of these perspectives leads to a market price, reflecting the consensus value at a given point in time. For instance, during an IPO, the final offer price is determined by balancing the expectations of the company (seller) and institutional investors (buyers).

3. Shareholder Value and Discounted Future Net Cash Flows

Shareholder value originating from a company's discounted future net cash flows, is a fundamental concept in corporate finance. This principle, based on the Discounted Cash Flow (DCF) model, posits that the value of a company is the present value of its expected future cash flows. In the Abilitie iMBA, I found interesting the concept that company value is a function of 3 levers that may be pulled in a myriad of directions - 'Growth' , 'Profitability' and 'Risk'.

Discounted Cash Flow (DCF) Model: The DCF model involves forecasting the company's future cash flows and discounting them back to their present value using a discount rate, typically the company's weighted average cost of capital (WACC). This method provides an intrinsic value of the company, independent of market conditions.

Forecasting Future Cash Flows: Accurate forecasting requires a thorough understanding of the company's operations, industry trends, and economic conditions. Companies like Amazon, which have demonstrated consistent growth and innovation, often have higher projected cash flows, leading to higher valuations.

Discount Rate: The discount rate reflects the risk associated with the company's future cash flows. A higher discount rate indicates higher risk, leading to a lower present value of cash flows. Companies with stable earnings and strong market positions, like Johnson & Johnson, typically have lower discount rates, reflecting lower investment risk.

Value Creation: By focusing on maximizing future cash flows, companies can enhance shareholder value. Strategies such as expanding into new markets, investing in research and development, and improving operational efficiencies can drive growth and profitability.

Conclusion

Love your stakeholders! The success and value of a business are intricately linked to its understanding and care for stakeholders, because these people estimate what the company's potential future value is.This in turn affects the subjective perceptions of value by buyers and sellers, and the strategic management of future cash flows.

By integrating these principles, businesses can create sustainable value, ensuring long-term profitability and stakeholder satisfaction. This holistic approach, grounded in stakeholder theory and sound financial principles, is essential for thriving in today’s dynamic and competitive business environment.

That’s it for now. I’ll let you know what else I find out.

Sources:

• Forbes Newsletters
• Freeman, R. E. (1984). Strategic Management: A Stakeholder Approach. Boston: Pitman.
• Damodaran, A. (2012). Investment Valuation: Tools and Techniques for Determining the Value of Any Asset. Wiley Finance.
• McKinsey & Company. (2021). Valuation: Measuring and Managing the Value of Companies. Wiley Finance.
• Apple Inc. (2021). Annual Report.
• Google Inc. (2021). Annual Report.
• Toyota Motor Corporation. (2021). Annual Report.
• Starbucks Corporation. (2021). Global Social Impact Report.
• Tesla Inc. (2021). Annual Report.