An underperforming company sitting on a cash reserve and tied to ongoing contracts presents a complex valuation challenge, particularly if it is publicly listed. Market capitalisation may fall below net tangible assets (NTA), sparking questions about the ‘drag’ on the NTA. Here’s how we can navigate these complexities to unlock value in a struggling business.
The Market’s Imperfections
Two primary factors can cause the market to undervalue a business:
- Investor Fatigue: Due to chronic underperformance, investors may underestimate the company’s intrinsic value.
- Management Decision-making: Investors often factor in potential periods of future underperformance, especially if they sense a reluctance to shut down operations.
The Dilemma of SaaS Companies
SaaS companies, especially those falling behind in the AI wave, often face this predicament. Such companies must either pivot or sell, but both options require accurate valuation to proceed.
Re-imagining the Business Model
The value of ongoing obligations can be re-assessed by:
- Structural Costs: Would delisting or restructuring reduce overhead costs?
- Staff Efficiency: How can staffing be optimised?
- Tech & Infrastructure: Can technology costs be reduced?
Understanding the Contractual Landscape
Critical questions include:
- What are the existing promises or guarantees made to clients?
- What’s the minimum team size required for delivering the promises?
- What percentage of the business is essential for meeting these client requirements?
Synergistic Benefits
Some purchasers might realise benefits not apparent to others. This could include staff reductions, quicker wind-downs, or even asset redeployment.
Modelling Future Costs and Receipts
Understand future costs related to staff, technology, and infrastructure, as well as the potential value and duration of existing contracts.
Efficient Breach: A Strategic Consideration
Sometimes, it’s more cost-effective to negotiate an end to current contracts than to uphold them, particularly when there’s little to no impact on the clients.
Caveats and Legal Duties
A detailed evaluation may reveal undisclosed liabilities or responsibilities, emphasising the importance of specialised advice in these situations.
Conclusion
Whether it’s fulfilling synergies for some purchasers or executing a managed shut-down for others, unlocking value in underperforming companies requires nuanced understanding and strategic action.
Ready to Unlock Hidden Value?
At Loosemore Advisory, we specialise in identifying and extracting untapped value in complex business scenarios. With our in-depth analytical framework, you’re one step closer to a strategic transformation.