For the majority, 2020 was a year for survival, some consolidation, and the lucky few even, a period of growth. The common thread between all of these scenarios is that company CEOs tended to be more reactive, tackling operational challenges when they would otherwise have been growing their business.
As the year draws to a close, it’s time to refocus and regain a broader perspective, aligning overall direction with the fiduciary responsibility to shareholders.
Milton Friedman’s view that “the social responsibility of business is to increase its profits” has become increasingly outmoded in recent years as organisations strive to balance purpose with profit. However, CEOs will definitely be analysing all avenues to drive value for investors in 2021, and every corner should be examined for potential ways to outperform the market.
Structure and supply chain
Alongside growth (whether that’s organic or through M&A activity), companies usually see an intrinsic increase in shareholder value. Although one element that often gets overlooked during periods of expansion is a proper consolidation of operations. When target acquisitions are absorbed into a corporate group, a review is rarely conducted post-consolidation into the effectiveness of multiple structures, supply chain impact, or associated tax implications.
Every aspect of a business needs to be carefully scrutinised
Structure-wise, all legal entities within a group cost money. The administration of a UAE company can cost between a few thousand dollars up to hundreds of thousands of dollars in annual government fees. From yearly filings and maintaining adequate registers to dealing with corporate regulator queries and annual audits, the list goes on.
When Bugatti announced their new concept car, the Bolide, headlines led with the weight reduction: down to 1,240 kgs from the Chiron’s 1,996 kg. It was achieved by examining every single aspect of the car for potential improvements. Similarly, you need to question whether separate entities are really necessary.
Any out-dated local partnership agreements can also be revisited to reduce sponsorship costs, and the results will usually improve EBITDA, driving value back into shareholder’s hands.
It’s always prudent to do a periodic supply chain review. Consider an RFP to keep your supplier pricing competitive or consolidate providers to achieve economies of scale. With the drastic shift towards digital during COVID-19, many online businesses created a supply chain infrastructure geared towards short-term sales, and they haven’t re-evaluated it since.
If that’s the case, areas to scrutinise include warehousing costs, insurance rates, clearing agent fees, third party handling agents, and even payment gateway fees. Make choices in the best interests of both the operations and the bottom line.
It’s advisable to check whether Double Tax Agreements (DTAs) apply to any new operations implemented over 2020. For example, KSA and the UAE entered into a DTA that came into force on 1 January 2020. With 115 DTAs currently in place, the UAE has been very active in ensuring its corporate citizens don’t pay tax twice.
A slight amendment in your operating models might uncover the benefits of a tax advantage that can be passed back to shareholders.
Corporate governance
The UAE introduced several new pieces of legislation in 2020 to improve corporate transparency and compliance.What is the link between additional governance requirements and increased returns? Put simply, non-compliance could cost shareholders dearly.
With fines starting at AED 50,000, the new governance mechanisms should be built into standard operating procedures, and a regular risk analysis undertaken to identify any potential gaps. ESR, in particular, takes a retrospective look at the business operations, and any change in activity could affect your reporting requirements. We recommend a minimum quarterly review to identify any required action.
There’s also a more direct connection between corporate value and company transparency. For any due diligence requests, credit checks, or third-party reviews, transparency is a must. Having everything documented and readily available will only increase stakeholder confidence. It also puts you in a better position to negotiate preferable credit terms and financing rates, all of which will deliver better returns.
Attracting investment
Forging ahead with a confident recovery might include looking for investment, exploring joint ventures and partnerships, or even formulating an exit strategy. Attracting investment is never easy, and in the current business climate, it might seem impossible. However, investments are still being made, and the pace is picking up.
Many investors with available capital have been holding back due to instability, and are now looking for the right place to put their money. From an investor’s perspective, finding a business that is well-managed, secure, streamlined, efficient and transparent is no mean feat. Einstein once said “In the middle of difficulty lies opportunity”.
That’s why getting your corporate house in order is imperative to stand out from the crowd as an attractive proposition. This means eliminating waste and being able to prove your company’s worth quickly by shining a light on the areas that investors will appreciate.
Other things to explore are JVs and partnerships. Once you’ve got your core business as lean and robust as possible, look for partners that can be used to leverage additional value. Think outside the box and consider complementary industries where there is additional value. Viewing your business as one organic entity and also several efficient entities (e.g. supply chain, products, and services) will help to open doors for additional revenue.
Perhaps a JV partner could benefit from your newly streamlined supply chain or even access to your finely turned back office. All options should be on the table.
As an owner, 2021 might be the year you’re considering an exit. How that looks will largely be driven by industry perceptions. Those in the online learning or video calling space (think Zoom’s 569% 2020 share price increase) will have an easier time convincing buyers of a higher EBITDA multiple than those in F&B or travel. Regardless, preparation is the key to maximising your purchase price.
Every drop of value needs to be squeezed from the business before waving the for-sale flag. You’ll be required to assess every internal factor and provide detailed research into why your proposed figure is appropriate. Having long-term contracts in place will help, as will cashflow and access to finance.
No one would argue 2020 hasn’t been a rollercoaster; anyone looking to build greater value for shareholders in 2021 needs to go back to basics to streamline their structures and embed good governance into the company’s DNA.
Shareholders will be watching to see not only who survives but also who thrives, and their barometer will be based on returns.