Can you leverage 100 to 1?
A couple weeks ago, I shared about the difference between Value Creation and Valuation. I hoped to show that while most focus on revenue growth and profits, risk and opportunities are what drive company equity values. More importantly, I made the distinction between financial capital and human capital. Human capital is not found on any financial statements; yet, governance (strategy, culture, innovation), relationships and knowledge are clearly what drives intangibles (such as goodwill) above merely the book value of a company.
So, the teaser in the above subject line is to challenge how much an impact you can make as a “value steward”. These thoughts have been covered by the Global Banking & Finance review. Let’s say a company enjoys a value of $10 million; however, the desired target for the owner is $25 million – a $15 million difference. Would the owner pay $150,000 (100:1) to have the roadmap and strategy to execute on that value goal and accomplish it in 6 to 24 months? If the upfront investment is too “rich” would the owner be willing for the value steward to have “skin in the game” and pay 1% to 5% in the back-end for value enhancement?
Step One: Benchmark
What is the company’s value now. More importantly why and what is the higher range opportunity?
Fees: $15,000 - $50,000
Step Two: Human Capital Leverage
Are all the stakeholders and advisors being optimally utilized and all risks managed?
Fees: $15,000 - $50,000
Step Three: Strategy Execution
Are all stakeholders aligned with getting from “here” to “there” efforts; metrics in place?
Fees: $25,000 – varies
What causes fee variability is the company, industry, situation complexity and timeframe. The willingness and desire of owners and advisors to embrace examining the business as a valuable investment counts. This means identifying resource gaps. These gaps are usually time, talent and treasure (funds). Focus tends to be on tactical and transactional, then daily blocking and tackling which consumes the resources that would otherwise be pursuing a more valuable company. If existing staff and advisors are used fees are contained. If existing staff and/or advisors don’t have the bandwidth or talent, then outsourcing may be needed.
Overarching is a followed and executed strategy that allows for more time to work on company value growth. Isn’t that what investors want? So, you have choices. Business as usual. Use “cost” as the yardstick if unfamiliar or disinterested in what “good” looks like. Or obtain “McKinsey-level” guidance rarely geared toward midmarket companies. Another option is own and read Equity Value Enhancement (“EVE”) and learn in several hours what 25 years and 1200+ engagements with the best and brightest owners and advisors have done to build their companies’ values
Carl Sheeler, PhD, ASA brings wisdom gained from his 25 years of strategic planning, governance, business
operations, finance and advanced analytics experiences to bring clarity to complex risk identification, measurement, management, and mitigation issues faced by family offices and businesses. He is the author of the John Wiley & Sons book titled Equity Valuation Enhancement, a treatise which addresses scaling 8- to 10-figure companies and has presented or published 200+ times for entities such as the American Institute of Certified Public Accountants, the American Bar Association, the Federal Bar Association and other organizations on value, strategy and governance. He can be reached at firstname.lastname@example.org or 424-253-0110