artificial intelligence, biotech, and other advances.
In each case, risk and its alter-ego opportunity are the cornerstones of how ideas and companies are valued. The difference is many wealthy families are pursuing direct investment with “patient” capital and vying with private equity groups for companies in which former may hold for decades, not just years. This is in part a reaction to the public company share price volatility that is less about company-specific risk and more on the speed and frequency of institutional trades.
To better understand the intellectual rigor to have enterprises and equities properly valued with risks identified that impact price multiples, we must have a certain degree of mastery of how value is created. This book goes to the heart of whether there is an over reliance on simply revenues and profits as well as financial ratios as current measures of company-specific risk. If so, we change the valuation industry discussion from measurement to active management roles needed by fellow advisors and business owners.
Who am I to ask and seek answers to such questions? I see myself less as a business valuation professional and more as a concierge and connector. The latter two allow me to be a strategic value architect and/or a chief-of-staff, as these attributes permit me to harness and align others' knowledge and relationships. (I don't need to be the smartest person in the room; I just need to know where she or he can be found.)
Before we delve into the issues that were the genesis for this book, here is a brief background of why I may be qualified to share my thoughts. During the past 25+ years, I've been engaged in valuing 1,200+ 7- to 10-figure public and private companies in myriad industries for clients ranging from professionals to private equity for what I refer to as the 6Ts: tax, transfer, transaction, transition, transformation, and trouble (disruption) purposes.
I refer to these matters as either planned or unplanned events. Unplanned are disruptive. I have been a court/IRS-qualified expert on 170+ occasions for tax, partner, shareholder, and third-party disputes and damages matters. During this period, I have been asked to assist hundreds of advisors, family offices/businesses, ESOPs, private equity groups, UHNW investors and public and private businesses to measure, create, manage, and/or defend $50+ billion in company values and counting.
After all this, I'm left with one humbling and overwhelming conclusion about business- and real estate–owning entrepreneurs as well as the trusted advisors who counsel them: We all don't know what we don't know. That may initially seem a bit simplistic, but there's quite a bit of depth behind it – which is the reason for this book.
This book endeavors to address why ultra-high-net-worth ($25+ million) entrepreneurs are able to continue to attain greater wealth through concentrated risk and why both private and public companies and their advisors who focus on more than financial statement measures may have better success. After all how do you measure persistance?
Spoiler alert! The UHNW have access to more and better uncommon knowledge. This knowledge truly is power. It is certainly true when it comes to valuation and, specifically, value creation.
Some Sobering Realities
From the fledging entrepreneur to the seasoned corner-office executive of a global company, growth decisions are made based on “build versus buy.” Build is organic growth, and buy is through merger and acquisition. It comes down to the risks and rewards of the time value of money.
No one chooses to start or acquire a business because they want to fail. Yet, the odds are stacked against even the most capable, regardless of which business path followed. Those who acquire must have adequate understanding of their capital needs (both human and financial) and their optimal utilization. Those who opt to go the angel investor/venture capital–backed route suffer a failure rate north of 90 percent. They often give up equity to their investors and set their sights on achieving hyper-growth as a result of their innovation.
However, those who choose the bootstrapping or “family and friends” funding route face a slightly better but still dismal failure rate near 80 percent within two to five years. They retain their equity, believing their idea will blossom into a sustainable business.
Small businesses ($5 million and lower revenues) have only a 25 percent chance of selling. Larger businesses that are acquired fail to achieve the synergies sought over 80 percent of the time, creating seller's and buyer's remorse. And, within three generations, many family businesses usually cease to exist or have been sold at least 85 percent of the time. Advisors are either part of the solution or observers to these preventable, sobering statistics.
Why do entrepreneurs still pursue the brass ring given these abysmal statistics? They're usually spurred on by the businesses that do succeed – something I call selection bias (ignoring the preponderance that fail). Or, they are either unaware of or oblivious to the high potential of failure – something I refer to as Economic Darwinism. They believe in themselves and their idea, ignoring all potential naysayers. Their demise is often failing to plan, which is a plan to fail.
What does this have to do with value creation? It should be obvious: Those who have achieved significant value are exceptional in the manner in which their investment is measured and managed. Those who overlook these critically important metrics and actions are more apt to fail.
Improving the Odds
It truly does take a village (ecosystem) to build and maintain a successful enterprise, whether an operational business or a portfolio of income-producing real estate. The endgame for most is leqacy and liquidity: that is, to sell or transfer part or all of their equity. Most investors in public companies buy and hold stock looking for capital appreciation (growth) and secondarily yield (income).
Ironically, most private company owners/executives do not know the market value of their companies, nor do their advisors. They have to think more like investors in their companies. Building value is an ongoing process of equity value enhancement, not simply managing sales and profits because they're easier to identify.
Savvy business owners will seek advisors who can best help them create value. Other owners will be complacent, accepting familiar over greater capability. Therefore, advisors have a critical responsibility to leverage governance, relationships, risk, and knowledge (GRRK) in client equity value enhancement (EVE). And business owners can foster success based on the advisors they select to counsel them.
As an example, it's important to seek professionals who are able to discern between economics, accounting, and finance backgrounds for a valuation expert. Each background differs, with financial expertise being more than merely generating or reporting numbers. These professionals must understand what produces results and reduces operational risk while elevating intangible value and what causes equity impairments. Arguably, the ideal valuation expert ought to possess a blend of strategy, operations, finance, and human behavior knowledge.
Further, there is a great difference between risks to an asset and risks within an asset. The prior is often tabled as asset-protection or preservation activity and the latter deals with risks inherent to the asset, its market, and its management.
These considerations would be inherent in any value creation plan. Focus on advisors who are proactive. (Most are reactive.) You may find it eye-opening to ask existing and potential advisors how they differentiate themselves. If you can swap their name or that of their firm with another name, they may not be adequately differentiating the influence of their knowledge and relationships to serve clients.
The ultimate holistic advisory team is likely to focus on elements of governance, relationship, risk and knowledge management and maintenance as a way to create value by leveraging intangible assets. It's not simply a financial capital game. It's a human capital one, too. It's about seeing what's driving operational performance. Values are more than numbers!
These are things an accountant, attorney, wealth advisor, insurance professional, or banker individually may not know – and may be unlikely to ask – so that's why a diverse advisory team is optimal. The ultimate advisory team is one that helps a company play an “A” game versus one that benefits from a company client that is playing their “A” game – a symbiotic versus a parasitic relationship.
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