Why MSMEs Should Target Highest Valuation When Sourcing For Capital

In Nigeria just as in many other countries, Micro, Small and Medium Enterprises (MSMEs) face unique challenges when struggling and competing for capital for growth and expansion. In this case, achieving the highest possible valuation can offer substantial benefits, providing a competitive edge and ensuring long-term sustainability. Below is an in-depth analysis of why MSMEs should aim for the highest valuation when sourcing capital.

 

Protection against hostile bids and shareholder activism

A high valuation can protect MSMEs from hostile takeover bids and stave off shareholder activism. Hostile bids are often driven by the target company’s share price, and higher market capitalisations tend to deter potential predators. While institutional investors are accountable to their shareholders and may sell if the offer price is attractive, a high valuation makes such offers less frequent and less appealing.

 

 Insulation from market volatility

A robust valuation can shield MSMEs from excessive market reactions to adverse news. For instance, sudden changes in economic data or exchange rates might trigger investor overreaction. If investors have a deep understanding of the company’s operations—such as balanced currency transactions—they are less likely to panic. Regular, transparent communication from the Investor Relations Officer (IRO) ensures that shareholders are well-informed and prepared for market fluctuations.

 

Competitive positioning

MSMEs with higher valuations and better communication strategies are more attractive to investors. When investors have a choice between two companies with similar financial metrics, they often opt for the one providing the most detailed and accessible information, provided the detail is within the ambit of the rules and regulations. Effective investor relations can distinguish a MSME from its competitors, both listed and private, by offering clarity and confidence in the company’s prospects.

 

Flexibility in issuing securities

A high valuation enables MSMEs to issue securities at favourable prices whenever needed. The time between issues can be several years, and market conditions can change rapidly. Regular and proactive investor relations lay the groundwork for successful capital market engagements, ensuring that the company is always well-positioned to raise funds efficiently.

 

 Reduced cost of capital

Quality investor relations directly contribute to value creation by driving share prices higher and reducing the cost of capital. Lower financing costs result from higher valuations, making it cheaper for MSMEs to raise funds for expansion and development.

 

Shareholder base

Targeting the highest valuation helps diversify the shareholder base, balancing different categories of investors. A diverse base includes institutional and retail investors, core shareholders, employees, and both domestic and international investors. This diversification spreads risk more evenly, mitigating the impact of any single group’s investment decisions. It also aligns the shareholder base with the geographic spread of the business, reflecting the company’s revenue distribution and enhancing investment appeal.

 

 Long-term stability

A well-structured and diverse shareholder base ensures long-term stability. Different investor categories have varied investment horizons, with some focused on short-term gains and others on long-term growth. By balancing these interests, MSMEs can navigate market crises more effectively, as institutional investors may repatriate funds quickly during turmoil, while long-term investors provide stability.

 

Enhancing corporate reputation

Aiming for the highest possible valuation enhances corporate reputation. High valuations signal strong business fundamentals, effective management, and promising growth prospects. This reputation attracts more investors, partners, and talent, fostering a positive feedback loop that supports further growth and success.

MSMEs in Nigeria should target the highest possible valuation when sourcing funds to protect against hostile engagements, manage market volatility, and gain a competitive edge. High valuations reduce the cost of capital, enable flexible securities issuance, and diversify the shareholder base. By focusing on comprehensive and transparent investor relations, MSMEs can achieve these benefits, ensuring sustainable growth and long-term stability in the competitive market.