Valuation or Value Creation?

After 25 years, I understand most see “what’s the [business] value?” as simple as determining the cash flow and the price multiple. Something that looks like $1,000,000 x 5 = $5,000,000 where the $1,000,000 is the economic benefit; 5x is the price multiple (risk/reward) and $5,000,000 is the value.

In the world of LegalZoom and TurboTax, it is easy to assume there is either a “Rule of Thumb” (“ROT”) or software that provides a value result. Sadly, there are such offerings in valuation, which is why some indicate that the result opined is “as much art, as it is science”. It also helps explain why both trusted advisors, clients and prospects ask “how much?” instead of “how good?”

I’m sure I would offend an attorney who drafts agreements and other legal documents if I distilled what s/he does as something that is commoditized. I would offend a CPA in the same manner. And I would offend the banker, wealth advisor or insurance professional if I commoditized their offerings as nothing more than rates and terms.

Why? Because there are so many individualized issues that a “cookie-cutter” approach would likely miss that the years of education and experience would be needed so the issues weren’t missed. I wrote Equity Value Enhancement (“EVE”) to dispel these service-is-a-commodity myths and over-simplifications.

Let’s deconstruct the valuation paradigm. I might agree before Daubert  (court case requiring applying scientific method replaced knowledge had to exceed what was known by a layperson) replaced the Frye standard. Before increased access to technology, a great deal of assumptions were necessary to opine a privately held company value. Hence, the “art-science” claim had merit….. then.

However, with the availability of comparative and industry data, company performance metrics such as growth and profitability can more readily be obtained. This allows an analyst to stop comparing a company against itself (trend analysis) and offer good metrics of what “solid” company performance in a specific industry might look like.   This is further assisted by increased industry transactional data to see what price multiples have been paid for same or similar profiles to the company being valued.

This research, analysis and synthesis makes determining the likely economic benefit ($1,000,000 in the example above) more supportable. Most experienced full-time valuators would agree. So, what about the price multiple (also known as the discount rate or capitalization rate shown as a percentage of risk/return expectation under the Income Approach)? This is the issue that separates the skilled analyst from those plugging in information into a software that spits out the result.   Stated another way the price multiple or rate is about the past and future risk of achieving the same or higher economic benefit.

So, if 5x represents the risk, 4x would be more risky (value would be lower by 20%) and 6x would be less risky (value would be higher by 20%). So, how did the analyst derive the 5x versus the 4x or 6x? Given that 6x would result in a value that is 50% greater than a 4x ($6,000,000 versus $4,000,000), it stands to reason that a degree of due diligence and intellectual rigor is necessary to provide support for the level of risk. Software generated results and ROT simply cannot adequately capture these company specific risks.

And notice, thus far, all issues expressed above are financial and operational. EVE literally dedicates 100+ pages to these types of risks. Thus far we have addressed financial metrics, but businesses are a living organism comprised of people, ideas and actions that financial statements don’t adequately cover.

While we know that the top line (revenues) and bottom line (profits) are important, much of the factors that influence value are not recorded on financial statements. I have distilled these factors using the acronym “GRRK”, which I pronounce as “Greek”. These factors concern human capital.

The “G” stands for Governance which includes company culture, innovation, structure/policies and most importantly -strategy.   So, a simple example would be to determine the level of management turnover and whether an articulated strategy exists and is being acted upon.

The first “R” stands for Relationships, which includes not only internal organizational relationships and those with clients, but those with a board, trusted advisors and vendors. How are these relationships being managed? Are they more transactional in nature or are they deeper creating synergies?

The second “R” stands for Risks. While this issue is very comprehensive, how a company goes about identifying, measuring, managing and mitigating risks and seizing opportunities will indicate whether it is reactive or proactive. It will show whether a company optimally leverages the relationships. Unless a valuator masters this, s/he is prone to follow a “check-the-box” recipe with nominal support identifying and quantifying this important factor of valuation.

The last letter “K” concerns Knowledge. This comprises both the ideas and innovation acted upon internally as well as those obtained through relationships and combinations. Uncommon knowledge when leveraged provides a significant competitive advantage which is difficult to replicate. This is what allows companies to differentiate and is why human capital is not simply “goodwill” as it also represented in the “GRR” of “GRRK” as well.

The purpose of this missive is to demonstrate, like other differentiated advisory services offerings, the determination of a business’ value is more than crunching numbers. It requires sufficient knowledge of operations and environment – a software generated result is inadequate. Commoditization reflects a lack of understanding of what a “good” work product looks like and its true worth.

This brings us to the bridge between valuation and value creation. There’s a significant increase in organizations and offerings for business enhancement services where data obtained from a client will generate an attractive looking software generated report that purports to flag company deficiencies and strengths. Once these elements are addressed, the provider claims s/he will be able to increase the value of the business. Quite a few of those who are attempting to apply these principles to generate more business revenues neither possess the industry knowledge nor the strategic and operational acumen to master much less effectuate the changes necessary.

As I have endeavored to compress 25 years into this missive, I liken the above to offering Fen-Phen (claimed weight loss pill that resulted in deaths and was unceremoniously pulled from stores’ shelves) versus the more practical and pragmatic diet and exercise. The latter may not be as appealing and takes more effort and resources, but the results are proven.

So, what do valuation and value creation have in common and where do they differ? Valuation is a performance benchmark as of a particularly point in time. A well written report will identify and measure the risks that led to the rates and multiples opined by the analyst. However, if the owner and advisors are interested in getting from “here to there” and wish to enhance the company or equity value, they must also manage and mitigate risk. This takes a holistic effort with an executed strategy involving skilled and invested stakeholders who must have the humility to align their own needs with that of the owner.

EVE provides the framework from elevating from management to mastery by leveraging human capital.

An interesting side-bar: When valuation analysts are asked to "discount" the value of owning a minority interest, what the client or prospect is actually asking is to reflect the asset, enterprise and equity level risks that support the impairments of ownership.  In other words, the equity level is seldom the same value as the percentage interest of the whole, so some degree of concession is sought.  The empirical support is how risk and volatility influence the liquidity (market demand and pool of buyers).  It, too, is not simply an arbitrary figure.

Why I wrote Equity Value Enhancement - LINK:

Bezos, Cuban, Schwab & Winfrey have "EVE". Shouldn't you?

"EVE" = Equity Value Enhancement.  Folks smarter than I defied conventional wisdom and supersized their companies and their brand.  EVE is about what they did:

1) Leveraged human capital;

2) Mastered risk; and

3) Ensured every $ spent was leveraged.

Say, a very successful business owner works 60 hours weekly and receives $15 million in annual compensation equating to $5,000 hourly.  You have two ways to be a hero if you're trying to win this prospect's business.  You can save the client time.  How much would you pay if someone saved you 100 hours annually (in this example $500,000)?  The other is: Can you provide 10x or more for every dollar in fees or commissions?

As a "Strategic Value Architect", I see these pervasive opportunities and endeavor to work with owners and advisors to be value stewards for their very best clients.  I'll use a CPA as an example.  If most CPAs are tasked to keep taxes to a minimum then how do they add value? 

What if the owners had funded their buy-sell agreement with life insurance? What if the CPA and owner discussed how the owners used their time?  What if new equipment produced twice the widgets in half the time at their company?  What if the building's depreciation was accelerated by applying cost segregation?  What if company debt and line of credit were better managed?  What if bylaws were updated? 

Owners and advisors alike often assume value is derived from levels of revenues and profits.  That's only half the equation.  The other is the level of risk and human capital leverage.  Assume a debt free company had $5 million in profits (free cash flow) and as historically operated was given a 5x price multiple (the multiple reflects risk and opportunity on a going forward basis). This provides a $25 million value. 

Now assume the CPA's involvement results in $6 million in profits even with new debt (and interest payments) to acquire equipment; the bylaws are updated; life insurance is purchased; and, the owner now works "on" versus "in" the business.  The price multiple increases to 8.5x and equity value is now $51 million - $26 million in "new" added value. 

Let's say to achieve this the CPA and other advisor commissions and fees were $260,000.  BAM!!!  That is a 100:1 return on investment! 

So, you have two choices:  Business as usual (See Einstein's definition of insanity above.  How's that working for you?).  Or like Jeff, Mark, Chuck and Oprah who have a copy of EVE (it's true), you apply these and hundreds of knowledge nuggets in a #1 rated Amazon book - EVE.

If you want a preview (first few chapters free), click here

If you want a money back guarantee, click here to order EVE. 

IS SHIRTSLEEVES TO SHIRTSLEEVES IN THREE GENERATIONS A HOAX?

Who doesn't love factoids.  In the 12/21/15 edition of Barron's, a study by PwC and UBS found that in 20 years only 126 of the 1995 billionaires (289) remained on the list.  Business failures and family dilution were among the reasons provided. Did the heirs destroy or divest the asset that created the wealth?

No doubt gratification versus growth is a real business owner paradox.  When we hear most businesses have $1 million or lower annual revenues, what do we think?  First, you don't bank sales.  You bank net proceeds.  Then we wonder why after a few or many years these businesses never really grew.

While most prefer "baby" I will refer to these businesses as "the beast".  Why?  Because most parents would never consider raising a malnourished child, but many owners will take cash needed to grow a business to pay for their own wants.  (Notice I didn't say "needs".)  So toiling 60 and 70 hours isn't enough to grow a business.  It needs adequate cash ("capital") or it starves.  Capital can be obtained from the profits of the business or borrowed or invested funds.

A tell-tale problem is when a line of credit (debt) is tapped because revenues, collections or profits dip and the owner still wants (or needs) compensation even when the funds from the beast's operations or reserves (piggy bank) aren't there.  These behaviors are quite common and often explain why most companies can't be sold as they are essentially a "job" created for the founder and the "baby" is only beautiful until it isn't ("the beast!"). Few buyers want it.

Less common is after years of toil, the business generates more sales and profits.  The owner craves a reward for the sacrifice (and too many PB&J sandwiches), so seeks compensation a little too much too soon.  This partial abstinence may allow the company to reach $5 million or even $10 million in sales; however, most companies hit this growth ceiling due to both financial and human capital reasons too many to address in this post.  My Wiley book "EVE" addresses these issues ad nausea in a reasonably entertaining way.

Let's pull out the calculator and perform a VERY simplistic scenario.  Assume no inflation. Owner "A" decides to over-compensate both salary and distributions and in 20 years with the following results:  The business "needed" $200,000 to fund "typical" 4% per annum industry and market level growth and could have achieved 10% growth if $500,000 had been wisely reinvested in the company. 

Let's say the business was worth $5 million and paid the owner $250,000 per year, but the owner took another $500,000, so growth is an anemic 2% per year.  If the owner is operating a "lifestyle business" versus reinvesting the extra $500,000 in marketable securities or investment real estate each year in a personal account, then the "extra" amount received equates to 20 years times $500,000 (maybe more and maybe less - this is for illustration purposes) or $10,000,000 for gratification plus the $5,000,000 in company value plus the 2% compounding for the 20 years (an extra $2,430,000) or $17,430,000.  The $7,430,000 company and some nice toys are to show for the 20 years of effort.

Owner "B" defers gratification preferring growth.  This owner enjoyed a 10% year-over-year compounded growth and as a result had $33,700,000 value to show for 20 years (and likely has other investments) while still maintaining an upper-middle class lifestyle.  It is clear the benefit of compounding provides almost double the economic benefit when considering Owner A's gratification.

Now that $33,700,000 figure is relevant as it constitutes what is referred to as Ultra-High Net Worth (UHNW).  According to Wealth-X, there are about 70,000 individuals in the United States who are UHNW.  Most are facing the scenarios in this post.  My function as a Strategic Value Architect is to ensure they or those wishing to join their ranks achieve the highest possible enterprise value while also considering philanthropy and tax minimization.

So, what has this to do with the "Shirtsleeves to shirtsleeves" challenge?  In our example, Owner B was 30 when the business was worth $5,000,000 and 50 when it was worth $33,700,000.  Care to guess what age 65 would look like at this rate?  If you said a $142,000,000 value is likely you'd be correct.

Now assume the business stayed in the family and the same business growth (from expanded offerings and markets) was sustained with each of three adult children having an one-third interest. Assume magnificent tax planning and each child is a triplet and has the same deferred gratification principles as the founder and spouse.  Their one third interest is valued at $47,333,3333 ($142,000,000/3) when they were 40 and the founder was 65.  They operate the business for a generation or 20 years. If you guessed that each equity interest owned was worth ~$200,000,000 when they reached 60 you'd be correct.

What would happen if the founder's advisors had suggested not maintaining concentrated risk (keeping in mind their wealth was created by doing just that). Will the family benefit from control if they sell 100% of the equity?  Does the family need the liquidity?  What are their other options to include family legacy or hiring professional management for the company?  How would the financial institutions manage the proceeds from a sale?  Would they be more risk adverse?  Would they select a passive portfolio? Would it achieve the levels of yield and growth (total return) that would allow the family to maintain their existing lifestyle(s) or would principal erode as the founder and spouse spent it?

I intentionally eliminated the specific annual spend of the family members; however, wanted to illustrate that even with the "dilution" by having three children receive the valuable asset(s)/interests the worth was "greater" than when it was received by almost four-fold, 20-years later.  This ought to raise the question of whether risk aversion and not necessarily risk alone may, in part, contribute to the decline in wealth from generation to generation.  In fact, even a reasonably responsible beneficiary could prevent the erosion of the principal while keeping the business asset by maintaining a minority or majority equity stake if family members may not wish to operate the company.  This may be seen as a "messy" option by some firms looking to administer family wealth.

The conversation ought to focus on whose risk optics and who has skin in the game and how do all of these parties get compensated.  That is why liquidity, legacy, leverage and learning must be part of transition event planning.  This requires an independent perspective with the wherewithal to ensure advisors and families are aligned when such important decisions are made without inadvertently placing biases or short-sightedness into the mix.  Consider the additional "mess" of a disruptive event like death, disability, divorce or dispute.

My financial peers may admonish me.  They will argue "reversion to the mean," which suggests most investments at some time will not continue to perform in the top-tier of their peer groups due to a myriad of issues.  This is true as a general statement, but the very premise of a 9- or 10-figure company suggest families can succeed in beating the odds with organic growth and M&A.

The issue of stewardship versus cashing in might be settled in practice, but not in theory.  I leave this to the post reader and welcome your thoughts.  If you liked what I had to say here, please share with your followers and feel free to read these other thought-provoking posts.

Why I Wrote Equity Value Enhancement ("EVE")

What top 1% of advisors and entrepreneurs know

What is your risk vs. opportunity optics?

Keep some powder dry ("liquidity") for 2016

Brooklyn-born, USMC Tank Officer & PhD Writes Wiley "EVE" Book

What top 1% of advisors and entrepreneurs know

    EVE AMAZON LINK  FREE EVE REVIEW COPY  LAST PULSE POST

 

 

Last week I raised what may be argued to be two straightforward questions on LinkedIn Pulse and promised to answer them.  They are:

What is the difference between an economist, accountant and a finance professional?

What is the difference between cost, price, value and worth?

Before I reply, I will share it is rare to respond correctly, which is both the challenge and opportunity that prompts me to share this post and write Equity Value Enhancement ("EVE").  No, B.S.  I do want you to buy the book or take the time to review the first few chapters for free.  You'll then see why it was important to capture and share what 1200 engagements in 25 years has taught me.  In short, the top 1% have mastered two principles of leveraging human capital and managing risk by investing in unique knowledge and relationships.

I digress.  Remember in high school that there were A-students, B, C and so on?

Auto insurance and repair businesses know that we can't all be "great" drivers even though when asked most respond they are.  In the business world, there are those who push themselves to strive, question and answer.  There are those who show up having earned the right to practice their profession and those who "dare greatly" to make their own paths instead of following others.  

Let's take the practice of law.  Having worked with hundreds of attorneys, there are varying competency levels and personalities as there are disciplines.  So, a solid generalist may be ideal for some matters; whereas a trust & estate litigator may be preferred in others.  The layperson might understand the two differ, but we can't assume this is true.  They don't know what they don't know. 

Let's take the practice of accounting.  Many use the general term accountant or CPA; however, within their profession, there are those whose discipline is primarily business and/or personal tax returns; others that focus on audits; and others are compliance oriented.

The point is that not only are there gradients of ability, but also specialization. 

Not all are great students or drivers or service professionals.  Now consider, the amount of resources owners expend working with existing professionals and those vying to secure business away from these relationships.

If owners see these services as necessary does this equate to their having value or are they expenditures that come down to rates and commissions paid? The provider will always justify s/he is receiving a fair amount (akin to that we're all good drivers).  However, if other providers can render the same services or relationship "quality" at the same levels, no differentiation is provided.

In fact, by negotiating fees when clients/prospects may not have a full understanding of what is being received frames the discussion of the offering as a commodity.  (What question would a patient likely ask a heart surgeon even if the patient does not perform surgery?  Is it cost or success rate?)

Providers can end up compounding the "fees/rates" issue as they are easy measures when they are sourcing other needed services they're unable to provide.  Give witness to the "not enough detail to determine scope or complexity" inquiry of "So my client needs 'X', what will it cost?"  This all too common exchange occurs because most fellow professionals do not or will not take the time to genuinely understand what constitutes a quality deliverable from an "adequate" one.  The real fear of god issue is what is the impact on the client and when will it present itself, such as an audit or dispute?

Then there is the issue of synergies.  Most advice is ad hoc, one-off, technical, tactical, transactional.  Each profession based upon its own orientation may see a solution.  The age old analogy of describing different body parts of the elephant, while never ensuring all looking at the same animal may have differing and conflicting vantage points.  This, too, is all too common owner predicament, which compounds the frustration and hesitation to act.  Think inefficient at best and ineffective at worst.... and that assumes all are competent professionals.  Is it any surprise the prospect/owner wants to minimize what s/he's paying?

So, what the 1% does that is different from others is know the answers to the two questions above.  They require a strategic ("holistic") approach that aligns advisors and owners, which forces them to play an A-game, which includes collaboration and cohesion.  The owner will always be willing to pay a premium for receiving something above the rate and/or commission as the return of value that is provided far exceeds that amount paid.  The provider's success becomes the owner's success as is the converse benefit to the provider.  

The above links are for a reference guide  that is replete with knowledge nuggets and these optics from both owners and advisors.  Who better than a Strategic Value Architect to build this tool so owners and advisors can add value?

As the quote from Warren Buffet above indicates and Oscar Wilde admonishes the trap of 'knowing the price of everything and the value of nothing'.... now the layperson can answer (needless to say the above discussion provides indications of what happens when the differentiation can be made).

COST is what is considered and the benefit of what an alternative would have given. PRICE is the amount paid in return for goods and services.  VALUE is the measure of the benefit believed to be gained from the goods or services for which one is willing to pay, which may or may not be its WORTH.  (A simple example is if it cost $0.15 to produce a jug of water and it was sold between a price of $0.75 to $1.25 would you pay $1.25 if it was the only selection available?  What's its value if you hadn't had any fluids in three days and would you be willing to pay $10.00?  How about if that gallon was poured into a pool of water and it was the difference between drowning or not?)

ACCOUNTING is concerned with the gathering, reporting and analysis of business transaction data according to the principles of relevance, timeliness, reliability, comparability, and consistency of information or reports.  The social science of ECONOMICS studies the production, consumption and distribution of goods and services through the behavior of people, companies, industries and nations to evaluate and quantify why they're doing what they're doing.  The science posits that capital should always be invested in a way that will produce the best risk-adjusted return.    Whereas, FINANCE actually figures that process out as it reflects investing decisions and risk management.  It is concerned with the time value of money, rates of return, costs of capital and optimal financial structures. This recent Yahoo Finance piece is an example.

So, here's the thing.  Care to guess which profession performs the most business and equity valuations and which profession requests it?  It's not Financial professionals.  These practitioners tend to perform two to four per year.  If we assume mastery equates to 10,000 hours as a minimum and three valuations take about 100 hours; then mastery would take no less than 100 years.  Yet, it is common practice for advisors and owners to make a retention selection on the criteria of fee.  This reminds me of the Best Western commercials where the well slept guest feels good enough to be a surgeon.... just that he's not.  And second to ourselves and families, what is the most valuable asset owners have?

This type of issue has incalculable consequences and lays business owners bare to consultants and advisors who may be well intentioned simply because the time to at least distinguish what "good" or "great" is strains commitments of time and importance.  That is in part why EVE is a timely book (Pulse Post received 2,000+ views) as the largest number of business owners are baby-boomers and most have no idea their susceptibility to the fee versus value received equation. 

Now the reader understands why some advisors are paid for performance and why some owners grow $50 to $500 million companies.  They leverage human capital while managing risk.  It's simply not financial and tax engineering alone.

Nothing says love like commenting on a post or sharing it with your thousand closest friends.  Is it a great idea if like a tree in the woods falls and there is no one there to hear it does it make a sound?   :  )

EVE AMAZON LINK  FREE EVE REVIEW COPY 

What is your risk vs. opportunity optics?

First things first.  (I'll answer the two questions below in my next Post; however, I invite the reader to respond as the replies may be illuminating.)

What is the difference between an economist, accountant and a finance professional?

What is the difference between cost, price, value and worth?

If there is a series of transactions of public stock between sellers and a buyers ("investors"), then there are two unique things occurring.  The amount between the ask and bid is referred to as a "spread".  Somewhere between is where parties agree and a transaction is consummated. 

But in those unique transactions, the buyer believes there is upside potential unique to the specific investment and the seller believes that liquidity or an alternative investment is preferred.   Can they both be "right"?

This takes us to the notion of if the majority of advisors or investors are acting on bullish or bearish behaviors can they both be "right" or do they cause the "herd" to create a self-fulfilling prophesy?  (It's a contrarian play!)

So, we go full circle to the issue of "risk".  Whose risk when and why?  Let's start with individual choices.  While many wish to become entrepreneurs, fewer actually do.  And among those who choose the entrepreneurial route few succeed to remain in business and a few more have created a job and some degree of independence, but not much else.  So, the pyramid getting from $1 million in sales to $5 million narrows and to $10 million to $25 million narrows more with those achieving $50 million and above rare.  They have mastered not just their product and service offerings, but have been adept at managing both their financial and human capital as well as risk. 

Admittedly, there is an ongoing founder struggle with gratification. versus growthThis means the founder chooses the sum to be paid for time, ability and risk versus what is to be reinvested to grow the company and receive the reward of a higher value.  Most would be shocked to learn if the company fails to have an adequate amount reinvested versus the shorter term benefit, this is a primary reason for being stuck at $5 or $10 million in sales.  Worse, the value can be many fold greater due to compounding in as short as just 10 years.

Then there are those who prefer the reliability of steady pay with some aspiring to become CEO, Managing Partner or tenured one day.  Similar to professional athletes, there are many who aspire, but few who actually achieve these outcomes. 

So, when an advisor working at a financial institution, law or accounting firm suggests to an entrepreneur they should mitigate risk, the real question becomes risk as opposed to what?  The common answer is diversification and often this means publicly traded securities.  Yes, this might result in less risk and more liquidity, but it does also mean less control.  This is why many an owner is hard pressed to act on such advice in a big way as the advisor doesn't have shared skin in the game or may economically benefit by the prospect or client acting on the suggestion.

So, as another example, the accountant may focus on the "risks" of taxes.  How does that influence risk of the performing asset, such as an operating business or real property holdings?  Stated another way, if you were earning $1 million in profit and paid 40% in taxes, but could earn $2 million and pay 40% in taxes would you select the $1.2 million over the $600,000?  So, don't let the tail wag the dog.

Then there are the issues of asset protection tabled as a way to preserve principal.  Again, the common end game tends to migrate to liquidity and diversification.  If an owner is pocketing $2.5 million annually and spending $2 million annually and then sells the asset for $20 million net and can expect 4% after tax, this produces $800,000 in annual spendable funds.  Unless the prospect/client expects to reduce his expenditures by $1.2 million a year, the viability of protecting principal is an artificial construct.

So, what "is" the solution to the above realities?  The asset would have to net at least $50 million to generate the $2 million annual spend (pre-tax).  If the the prospect/client relies upon the trusted advisors who are unable, unaware or unwilling to assist in enhancing the value by another $30 million are their ideas of "risk" aligned with that of the person they're seeking to serve?

Stated another way, if the client "knew" that services rendered would be billed for  $300,000 or even $1,000,000, but would produce the $30 million increase with a return of 100x or even 30x on fees expended would they agree to doing so?

Then there is simply "out-of-the-box" options.  Options may include hiring an industry executive who would be all too happy to have a salary plus participation in profit and/or value growth (of course that would mean that parties would have to know the benchmark value).  It might mean hiring an MBA student as an intern to learn the industry while the MBA educates the founder on best practices.  It might mean grooming key staff for more important roles.  It might mean selling a minority interest to a private equity firm that has the funds and personnel and contacts unique to the industry.

The next time a client, prospect or a trusted advisor from a different profession asks what are your fees and commissions, it is more likely they have little knowledge of the answers to the first two questions raised above.  The entrepreneur knows there are risks and has had some success in seizing opportunities.  Perhaps the question is how do advisors prove their mettle to be more worthy of the services they wish to provide and is there a distinction between the solutions they offer that reflects a track-record of helping past clients grow their businesses to 8- and 9-figures or more?

Equity Value Enhancement (Amazon Link) was written with a focus on risk identification, measurement, management and mitigation.  It suggests that most can have a reasonable influence on business' finances (sales and profit growth and adequate levels of capital).  The challenge is the human capital which calls for having a legitimate strategy (versus tactics) to leverage uncommon knowledge and relationships to influence risk.  (The lower the risk, the greater the multiple and closer to the $50 million target in the example above.  More to the point financial capital alone won't buy its way to the target without a merger or acquisition or a holistic approach to harness the human capital of advisors, owners, staff and other stakeholders.)

LINK: Why I wrote "EVE"

LINK: #1 Amazon Book in Category

Keep some powder dry ("liquidity") for 2016 private & public equity opportunities.

1.  Up to 2007 many public companies' share prices were higher due to use of leverage (debt) of companies and the "artificially-rich" middle class (using home equity loans) playing the market as most investments were only going up.

2.  These retail investors after seeing much of their windfall and principal erode in 2008 and 2009 went to the "safety" of low yields where earnings were 1/100% or 1/10% on every dollar held against the backdrop of the 2% inflation rate.  No way, with those returns, were they going to recoup their equity losses.

3.  The U.S. government creating market liquidity and velocity embraced a fiscal policy to print money (trillions of dollars) and inject it into our economy.  These funds made a Wall Street detour.  Institutions having taken a heavy hit in their investments and needing to recoup returned to the market to get their share.

4.  Despite the global financial malaise (and likely due to abundant shale and a glut of cheap oil) more affluent families and companies are "reporting" better results because all those dollars flooding the market were injected into the equities eventually creating "performance" at or exceeding 2007 levels.  A "rebound".... using a deflated 2015 dollars for comparison.  We dodged a bullet as the balance of industrialized nations did the same thing... later.  Now most nations ~ i.e., taxpayers, have taken on additional debt.  Add an influx of retail investors (late to the party) trying to restore their 2008 and 2009 losses.

5.  While the low interest rate environment wasn't so great for folks on fixed income and savers; it has been a boon to working families, corporations and for the housing market.  Who doesn't want a low-interest rate new car or 65" flat screen television?  (Yet, credit card rates haven't declined, but balances have returned after folks went cold-turkey from their buying sprees.) But these prices and rates are artificial contrivances with no correlation with risks that influence their levels.  As rates rise, home price growth will slow and so may the economy 

6.  Wall Street has little to do with main street.  Modern portfolio theory has almost nothing to do with individual company performance; hence, the distinction between a market of stocks and the stock market with the former requiring due diligence and deep analytics.  Do institutional investors, who represent the majority of stock trades, really believe the daily pundits of what's causing the market's rise or fall?  What does quarterly performance have to do with legitimate mid- and long-term performance/market risk?  If 2007 share prices were a result of corporate debt, what is driving the high prices now? 

7.  Are GOP members fiscal conservatives, when the left uses higher taxes and the right uses debt to pay for what special interests want?  Likely both presidential candidates after the primaries will feed from the Wall Street trough. Somehow they'll convince the working- and middle-class struggling to support their families and pay for their kids' higher education or vocational training that their parties' fiscal policies will be job creators if just the right skills were held.

8.  If Warren Buffet's selections have the Midas touch, why don't most follow his selections with the same net returns?  Because he uses a major insurance company that shields most taxes and selects boring companies whose steady growth compounds.  Who needs homeruns if you can double the value with steady growth every six years.  His own estate plan and two Economics Nobel Laureates have indicated index funds are the best hedge for buy-and-hold investors and low loads (costs).  This is why Vanguard is the behemoth it is.

9. So, what does this have to do with keeping powder dry?  Most investment bankers know there has been a steady decline in many sectors for midmarket company transactions since 2H15.  Yet, too much cash chasing too few deals has kept values inflated.  Then there's the herd of institutional advisors endeavoring to attract the mildly or more wealthy to follow a common path creating a self-fulfilling prophecy of marginal performance as the majority can't all be on the buy or sell side.  Seldom does conventional wisdom create massive wealth.  Ask any entrepreneur with concentrated risk.  It is they and the contrarian value and activist investors digging deeper who can.  If the music stops creating illiquidity and a downward pressure on equities 2016 is likely to be a buyers' market. 

10. If the market correction is more abrupt than in 2008, many opportunities will be abound in the broader market.  Yet, many $50 - $500 million companies (public and private) are already fairly priced or below market because they're thinly traded or private.  (LINK) This due diligence and operator skills is not simply a matter of financial engineering.  Often values are influenced by board and management decisions with an almost slavish focus on revenues, profits and taxes, instead of the risks that can often most influence equity price multiples

Am I being a prognosticator, a pragmatist or a pundit?  What does your crystal ball say?

19 Days to Game Changing Wiley Book Release! December 10, 2015

I want to thank the 150+ reviewers and the 1,000+ folks who have pre-ordered this book.

Simply put, 50% is about tapping into human capital to create more value as a owner by better utilizing trusted advisors. 

The balance is about reducing basic operating risks and exploiting opportunities.

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Be part of 1,000,000+ "mob" to support veterans & horses by doing good for business owners-12/29! December 22, 2015

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