How Small And Mid-Cap Companies Can Defend Their Valuations

From the Forbes CFO Newsletter by Megan Poinski

Off The Ledger
How Small Companies Can Defend Their Valuations

 When investors look at the stock market, there are some extremely obvious—and attractive—companies that catch their eyes. According to the Motley Fool, the “Magnificent Seven” tech companies currently make up about 35% of the S&P 500’s total value.

But what about all of the other public companies—especially small and mid-caps?

“I like to think of this as kind-of the forgotten or overlooked asset class,” said Moira Conlon, CEO and founder of strategic communication firm Financial Profiles. “It’s not where the spice is.”

When small to mid-cap companies are overlooked by the masses, that typically means they don’t get attention from investors, either. It’s difficult for them to have an accurate valuation. And without that, it’s hard for them to tap into the financial benefits of being public, like easy access to capital, as well as using their stock to help with funding and as employee compensation.

Because the one group paying close attention to small to mid-caps, Conlon said, are activist investors. And they’ll gladly buy huge chunks of stock, replace board members and change a company’s plan to be more effective in their eyes.

“It’s hard enough to run your company as a small or mid-cap company,” Conlon said. “I always like to say, a small business needs everything that a bigger business needs, only there’s no scale. These companies already have their hands full, and they’re usually trying to execute on either interesting growth or turnaround strategies or things like that. This activism and this sort of thwarting of the strategic plan, it makes life very challenging.”

Before starting Financial Profiles, Conlon spent decades in investment banking, advising companies on investor relations, transactions and corporate communications. Her firm works with small and mid-cap companies on these communications, helping them identify where their valuation is faltering, and how to increase it.

Strategic communication is vital when it comes to a company’s valuation, she said. And while a small company isn’t going to have the comms strength of Google, Conlon said companies still could do better with their marketing to Wall Street, following up with potential investors, and getting themselves in the right media spaces. Communications could make a 15% difference in a company’s valuation, she said.

Part of the problem, Conlon said, is many companies don’t have a big team for investor relations communications.

“You think about how much companies spend on marketing of new products or product launch: Tons of money,” she said. “And then it’s like, we’re talking about marketing your No. 1 most important asset: your access to growth capital. These staffs are so lean and mean that they can hardly get the job done.”

But it’s not just having the people to get the message out about a company. You also have to know what type of story investors are looking for. It’s important to do a comprehensive examination to see what people think of your company—but also identify any internal problem areas, Conlon said. This kind of examination is similar to what companies already do as they’re growing and scaling, she said. After a company earns its first $1 billion, internal changes often need to be made to get to $2 billion. For the valuation portion, what do investors need to know about what your company is doing? What have they not heard from you?

Conlon said that CFOs need to understand the scope of the problem, and should be prepared to work to solve it.

“Valuations are complicated,” she said. “It’s not just one factor or two factors. There’s no quick fix. ...Value can be created by stepping back, looking at the big picture, figuring out what the key drivers of the valuation gap are, and then rolling up your sleeves and doing the hard work.”