Stand tall: a benchmarking analysis can help you increase your company's value.

• Author: Allen, Bradley J.
• Position: BUSINESS VALUATION

Comparing your company's key performance indicators against those of industry peers, known as benchmarking, produces valuable information to help you improve your company's financial performance and increase its value.

A challenge of effective benchmarking is using the right comparison with the right information. For example, companies often benchmark profitability indicators, such as margins or return on investment. A company's profitability indicators might portray it in a favorable light compared with its industry peers, but if those profits aren't being converted to cash, then the company's value might not be as good as its peers. In this case, the better indicator of a company's value might be free cash flow.

Benchmarking can be done against other companies within an industry, as well as across industries. For example, if a company that processes insurance claims has 200 offices nationwide, it may want to compare itself with businesses in the retail industry because they face similar challenges of managing multi-office or multi-store businesses.

WHY MEASURE VALUE?

Company value has an impact on public and private companies in areas such as:

Access to capital. The greater the value of your company, the greater return to the debt or equity investor, which should make additional sources of capital available to help meet growth or investment needs.

Cost of capital. Companies with greater value benefit in a competitive market from a lower cost of obtaining capital.

Exit value. The ultimate realization of value will be upon exit. Whether this is through a sale of the company, a public offering or succession plan, owners want to maximize their exit value.

While the concept of maximizing value is similar for public and private companies, determining the value is different. Value ultimately is determined by others.

For public companies, value is determined by financial analysts, institutional investors and others. For private companies, value is determined by financial institutions, individual investors and potential buyers.

The one thing those valuing public and private companies have in common, though, is that they need information about the company to do it. This is where benchmarking comes into play--but only if care is taken to find the appropriate company or information to benchmark.

A BENCHMARKING CASE STUDY

The CEO of a company that manufactures tribbles knows his competitor across town can sell the same tribble for 10 percent less. As...