[IMGCAP(1)]Compliance reporting may not be a top-line revenue driver, but it certainly impacts overall corporate valuation. Unfortunately, that impact is net negative for most companies.

Why? Because the high costs associated with manual reporting (let alone the damage a deficiency or, worse yet, a material weakness could cause) affect a key factor that drives the corporate valuation itself.

The average company wastes half a million dollars a year or more on manual compliance reporting. In the age of automated reporting, money spent to report manually is an unnecessary spend. A company can recover that half million dollars and realize a significant boost in valuation just by properly automating its compliance reporting. Let’s evaluate half a million dollars and what that might do for your business.

When companies are valued by independent firms — whether the valuation is used to establish stock price or acquisition price or bragging rights — the firms look at valuation using two metrics. The first metric is top-line revenue, with the valuation multiplier typically being three to five times. Using revenue as the valuation method, if you add an extra half a million dollars in revenue, that generates a valuation increase of $1.5 to $2.5 million. Not bad, but there are even greater gains to be found in the second valuation method.

The other way to calculate value is to assess the bottom line using a multiplier in conjunction with EBIT, earnings before income tax (but after all the other costs of doing business have been deducted). The company — public or private — seeking a better valuation looks for ways to increase EBIT. A fundamental approach to increasing EBIT is to take costs out of business. And automated compliance reporting is one way to drive down costs to the tune of $500,000 per year.

Currently, the multiplier bankers use against EBIT is anywhere from 17 to 23, so let’s use 20 as the multiplier. For valuation purposes, then, half a million dollars added to bottom line EBIT will increase the company’s value by $10 million —$500,000 x 20. What did that $10 million bump cost? Maybe a couple hundred thousand dollars, one time tops, for the right automated reporting solution that will pay for itself within a few audit cycles.

There are other ways to trim costs, of course, but few are sustainable over the long haul, and none delivers the efficiency and unimpeachable advantage of automated risk assessment and compliance reporting.

Ultimately, the right corporate compliance practices can make a balance sheet look better. Automation trims unnecessary costs, and automated compliance reporting and data gathering make a company more attractive and lead to a better valuation. There’s simply no reason to let manual reporting cripple a corporate valuation.

John H. Capobianco is president and CEO of Lumigent Technologies, Inc. , a GRC business apps company. He can be contacted at john.capobianco@lumigent.com.

Register or login for access to this item and much more

All Accounting Today content is archived after seven days.

Community members receive:
  • All recent and archived articles
  • Conference offers and updates
  • A full menu of enewsletter options
  • Web seminars, white papers, ebooks

Don't have an account? Register for Free Unlimited Access