privately-held businesses were started by Baby Boomers who were contemplating some exit in the mid-2000s. Then, from 2007 to 2012, we saw the Economic Darwinism: Businesses that underperformed were swept out of the market.
Those that survived picked up the remnants of competitors, as fiat capital (U.S. denominated dollars printed and electronically infused through treasury bond sales keeping the market moving through “Quantitative Easing”). Some thrived. These owners now find themselves looking beyond today's operational realities and starting to conceive a strategy that may include the sale of part or 100 percent of their equity.
The best-case scenario is a sale prepared for and at price/terms that makes the equity attractive to sell and able to produce the net proceeds an investor seeks. Rare, but it happens.
This is where my lament “they don't know what they don't know” is derived. Business owners can be blindsided by issues they or their advisors never saw coming like hyper-inflation from too much quantitative easing or an all-out regional war in the Middle East or the impact of oil or water shortages on their business. I have intentionally designed this book to demonstrate that no single perspective is adequate to create and sustain concentrated wealth.
While there are several underlying issues, the theme focuses on unmet critical needs in the professional advisory communities and in multi-generational entrepreneurial families. These knowledge and resource gaps often dilute rather than create value.
This is exacerbated by transactional, technical, and tactical thinking and language that compounds the disconnect between the advised and the well-meaning advisor. Most advisors favor preserving wealth through legal, tax, financial, and allocation strategies. They use terms like optimize. This is an example of doing things right versus doing the right things. Think of the absolutely perfectly dug hole in circumference and depth. Now, what if that perfect hole was unnecessary or in the wrong place?
Exceptional entrepreneurial families have overcome the odds associated with concentrated risk and wealth. Yet, most businesses started without a plan, or the plan is sell more and make a profit.
It stands to reason, they're as unlikely to have a plan when contemplating one of the 6T's. Meanwhile, right now the largest degree of wealth is transferring from the Baby Boomer generation, with the youngest reaching age 50 in 2014.
While families with modest wealth or revenues are not excluded from consideration, the book's focus is on what families have been able or wish to achieve by leveraging their trusted advisors' abilities to scale their company revenues and wealth to $25 million or more.
Governance (issues of culture, codification, and control), relationships (family, business, staff, and advisory), risk (what operational, legal andfinancial factors are overlooked), and knowledge (internal, external, uncommon, IP, policy/procedure, and human capital) are integral.
The book's eleven chapters illustrates that the letters and concepts of GRRK are interconnected. In the aggregate, their influence dramatically changes pricing multiples and economic benefit, proving that value creation is dynamic.
In Chapter 1, we provide some basics about what value is, as a way to lay the groundwork for the information that follows.
In Chapter 2, we explore fundamental trusted advisor relationships overlaid with the notion of concentrated risk and the owners who possess these unique esoteric assets. We provide distinct win-win reasons to operate within a purposeful and collaborative framework of relationships and connections that offers unique value beyond technical know-how.
In Chapter 3, we speak to business owners, providing them food for thought to assess whether they are working in or on their concentrated risk (their business), and challenging them to leverage all the resources they have to understand and to build value.
In Chapter 4, we address the traditional ways various professionals measure risks through their lenses, beginning with a brief list that's common to their perspectives. This provides evidence of the benefit of involving multiple disciplines and their alignment to ensure the big picture can evolve.
In Chapter 5, we focus on the role of governance: what it is, the role culture plays, and a healthy approach to measure, manage, and maximize governance's influence on value.
In Chapter 6, we focus on the role of relationships, assessing the various stakeholders, why they are deeply important, and how they can evolve in healthy ways that can lead to value creation.
In Chapter 7, we define and discuss the role of legal and financial risks, which are more readily found due to the financial metrics: a “warm-up” for the following chapter. Please remember, the lower the risks, the higher the price multiple; and the higher the price multiple, the greater the value.
In Chapter 8, we identify many less easily measured operational risks that also influence human and financial capital.
In Chapter 9, we address the role of knowledge, reflecting on how this human capital intangible provides considerable power that can be leveraged when better understood and harnessed.
In Chapter 10, we focus on the business appraiser, providing insight into how the importance of this profession is often overlooked and giving tips on what to look for in a seasoned valuator.
In Chapter 11, we provide four vignettes to tie together many of the insights and concepts shared within this book.
There will always be those who want the knowledge nuggets from a 30,000-foot view. While we encourage reading this book cover to cover, that may just be my own wishful sentiment. While not all inclusive, here are some of the top take-aways to consider and apply.
• Book value is seldom a guide to business value. The latter is dynamic and uncertain.
• Businesses are all their assets – tangible and intangible. They both have life cycles.
• The assets hidden below the financial statements often drive equity value.
• Governance, relationships, and knowledge are assets, not line items. They impact risk.
• How a company tracks and measures its assets influences whether value will be created.
• The higher the ratio of sales to fixed assets, the greater the likely value of these assets.
• Value creation occurs when both tangible and intangible assets are well managed.
• Relationships, knowledge, innovation, and culture (governance/strategy) drive growth.
• Risk and opportunity decisions often differ between entrepreneurs and their advisors.
• Risk management must consider internal and external variables in the context of an ecosystem.
• The ecosystem includes constituents whose ideas, insights, and actions must have alignment to be impactful.
• Leadership is not administration. Leaders inspire uncommon knowledge and actions.
• To differentiate a business must be dynamic. It senses, seizes, transforms, and scales. This is achieved through leveraged human capital.
• Optimal levels of employee retention and decision making are indicators of higher values.
• Most businesses and advisors focus on revenues, profits, and taxes – not risk and innovation. One deals with yield and the other capital appreciation.
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