2 posts from September 2009

Bosses

Once, a long time ago, I sat in my boss's office - a brand manager of a large consumer products company. It was Saturday, Christmas Eve, and the brand group joined the discussion. He extolled us to get a number of delayed projects done for review and approval January 1.

Right after the meeting, one member of the brand group (this was 6 PM) left for Christmas with family and our boss yelled "Get your priorities right, your family or your career!". (Parenthetically, the issues we work through on Christmas Eve were not reviewed with upper management until March of the next year.)

My immediate thought was our boss, the brand manager, was really messed up. The problem was the boss's priorities and his insecurity, which his subordinate's audacity of leaving work at 6 PM lit up like fireworks.

The brand's performance was not an issue with the rightness of the programs, but rather the inability of the manager to make timely decisions. Our boss was precise to a fault which got in the way of decision making. No matter how smart we are or become, information is never perfect.

As business owners, we need to make calculated risk judgments based on a high level of trust among out team. We need to honestly prioritize how our teams invest their time.

At another time and place I worked for the president of a company who was shrewd, in a good sense. He saw opportunities in weakness of competitors, loved learning ways to exploit those weaknesses, and had the political clout within the corporation to get resources to expose competitive weakness for market advantage. That game was fun, but at end of days failed to inspire his team to build to greatness, an idea sacrificed at the alter of short term short profits.

The point of all this is that there are bosses and company owners whose sense of life is low despite their technical acumen. They are able to distort the work life balance so they slowly and beautifully allow the dying of terrific businesses right before our eyes.

Seeing so many once vibrant businesses die, in part, is why I created MacDuff. I want to help company owners rewire their businesses for sustainable wealth (freedom in my terms) on the premise we can inspire achievement beyond our personal limited lines of sight.

Two of my bosses framed that big idea, John and Ben. John is collaborative, empowering, brilliant leader who taught me that we get there together or we don't get there at all. He helped simplify complex ideas so they could come alive. He embodies strength, fairness and morality that combine in an uncanny way to fuse together highly motivated, self-directed teams with records of uncompromising achievement.

Ben was inspiring in a different way. He was bold, flashy, had terrific imagination with a bias toward action. He was awesome and fun at his best.

When people whose careers we've touched think back on us, how will we be remembered? I sense that most of us never pause during our careers to question whether or not we inspire others to grow beyond the limits we see in ourselves.

Fair Market Value

Recently we have seen a significant increase in merger and acquisition interest in our client base. That activity prompted me to review business valuations for businesses sold several years ago. The first lesson from this review was the need to lose the emotional attachment to businesses and accept the agnostic reality of how businesses are valued. The second lesson from successfully closed deals was the need for clarity of objectives in buying or selling companies.

As background, we are talking about privately held companies with no empirical market value. That said, valuation is as much art as science. For private companies on both sides of the buy - sell transaction these are emotional events. Thus, knowing this and understanding in crystal clear detail the objectives of a deal allow shrewd buyers or sellers to effect trades that maximize the probability of realizing a successful deal beyond the transaction itself.

Published research suggests that 80% of all M&A transactions fail to meet their stated objectives. Consideration of any transaction, which also impacts valuation, must include post closing integration. To see our approach on maximizing probability of success, see our Basic M&A Checklist. (This MAP is read clockwise from 1 AM to Noon.)

Owners need to be aware there are many valuation models but all fall under broad families: a) Asset Driven b) Income Based and c) Market Comparison. Each model offers ranges of valuation metrics, which means company owners not experienced in corporate finance retain suitable counsel. Each merchant bank, PE capital or M&A specialist focuses on different industries, deal sizes even buy or sell side of transactions. (A short list of favorites follows.)

For example, a family valuing a company for an estate may want to obtain an independent valuation on a low end for estate tax purposes. Remember that a low base now may translate to significantly higher capital gains in a following sale transaction or may reduce the ability to collateralize future transactions. But we will settle on the low valuation objective for this discussion. A special note on this example: All states have different regulations that apply so local counsel is critical.

Here is an actual range of trading ratios for a consumer products company based on publicly traded like-company values several years ago:

Trading Ratios

Guideline Company Range

Selected Multiple

Bus. Enterprise / EBIT

5.7 - 11.5

5.7

Bus. Enterprise / EBIDA

5.1 - 10.0

5.5

Equity / EBT

5.5 - 13.2

9.0

Equity / Net Income

7.6 - 21.6

15.0

The various metrics relate to income statement entries; EBIT = earnings before income taxes, EBITDA = earnings before income taxes and depreciation, EBT = earnings before taxes and net income is revenue minus returns and product costs. The use of any of these ratios as benchmarks again depends upon the nature of the industry and objective of the business deal.

In fair value determination, premium or discount salaries to family members paid are normalized to industry standard, as are premium rent payments and other idiosyncratic expenses that benefit a family. This normalization may either inflate or deflate valuation depending upon the objectives of the parties to the transaction. Examples of other variables influencing valuation are:

  • Market or business category in terms of size, volatility, growth / decline
  • Competitive concentration and market share of target company
  • Nature and quality of inventory
  • Revenue composition i.e. few large customers with constant order streams or many small accounts with few repeat orders
  • Patents, trademarks or factors that give unique, sustainable competitive advantage.

Awareness of different fair market value methodologies is important for owners using their companies as a means of wealth creation versus current income production. All readers can understand that the range of ratios applied to whatever valuation metric is wide and the attending company value dramatically changes from the low to high end of the relevant range.

The key for me lies beyond the historic performance of a company. As a general rule, sellers are selling the past and buyers are buying the future. It is the potential a business has for future growth, a view I hold whether buying or selling companies. This gets back to the intangible but real value of brand strength and how to package a sale or conversely see extraordinary value in a purchase.

Regardless of turnaround or high growth going concern, I personally focus on the nature and strength of a company's perception in the collective minds of customers. Financial experts are essential in identifying and appraising fair monetary value and deal structure, yet real wealth is derived from grasping how to translate historic performance into ongoing profitable revenue while serving customers extraordinarily well.

Here are selected companies I know and their roles in ongoing transactions with us: AME Capital for client financing and acquisition of technology companies; Touchstone Capital for consumer product company acquisitions and business valuations; Millburn Capital for technology company acquisitions;Castle Island Partners for larger, consumer based business. By way of disclaimer, none of these company principals necessarily agree or disagree with views expressed here.