The Value Equation

The Value Equation
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Discover one of the surest means to create personal wealth by building a profitable business Every now and then, a business book comes along that offers original insights and a fresh perspective. In The Value Equation: A Business Guide to Creating Wealth for Entrepreneurs and Investors , veteran executive, entrepreneur, and investor Chris Volk delivers an engaging, straightforward explanation about how businesses work and provide wealth for entrepreneurs and investors. The author’s signature approach is centered on his award-winning wealth creation formula in a book designed to simplify complex subjects with math no more complicated than what you learned in middle school. Readers will become acquainted with the characteristics of successful business models, together with insights into how leaders can improve their own models in ways that generate personal and collective wealth. The author’s framework presented in The Value Equation is the foundation upon which most of the largest personal fortunes were built. Chris Volk also provides supplemental materials including interactive Excel spreadsheets, illustrations, and sample corporate financial models on a companion website. There is even a link to an award-winning video series created by Volk that served as his inspiration for the book. Full of illustrative case studies that highlight crucial business and finance concepts The Value Equation includes: Explorations of the true value of using OPM (Other People’s Money) and capital stack variations to build and grow your company. Advice on business assembly, growth, mergers, acquisitions, and corporate reengineering, including discussions of valuation multiples, common risks, and capital options. Guidance on how to valuate business models, delivered with help from a variety of stories and case studies. Uniquely, the author also draws on his own background, including the introduction of three successful companies to the public markets, two of which he was instrumental in founding. The Value Equation is an indispensable addition to the libraries of anyone interested in growing wealth and capital through business, whether as a business leader, entrepreneur or investor.

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Christopher H. Volk. The Value Equation

Table of Contents

Guide

Pages

The Value Equation. The Value Equation A Business Guide to Wealth Creation for Entrepreneurs, Leaders & Investors

Preface

Introduction

Chapter 1 Free Enterprise and Wealth Creation

In the Beginning Is the Idea

Unicorn Likelihood

Odds of Success

The Six Variables

Notes

Chapter 2 Daymond John and the First Variable

Accountants vs. Entrepreneurs

Variable #1: Business Investment

Note

Chapter 3 The Capital Stack and Two More Variables

The Right Side

Other People's Money (OPM)

Variables #2 and #3: Amount and Cost of OPM

Cost of Capital vs. Cost of Equity

Capital Stack Assembly

Equity Sourcing

Notes

Chapter 4 Three More Variables and Voilà!

Variable #4: Sales

Variable #5: Operating Profit Margin

Variable #6: Annual Maintenance Capital Expense

Putting the Six Variables Together

Gordon Growth Model

Equity Valuation

The Miracle of Compounding

Dissecting Investment Returns

Chapter 5 The Value Equation

The V-Formula

The Case Study V-Formula

EVA and EMVA

Making the V-Formula Even Simpler

The Case Study V-Formula (2:1 Sales to Business Investment Ratio)

The Case Study V-Formula (4% Maintenance CapEx Ratio)

The Case Study V-Formula. EMVA Creation

Solving for Other V-Formula Variables

V-Formula in Reverse. Determining the Desired Amount of OPM

V Formula Variation. Determining OPM Interest Coverage

V-Formula Data Tables

Note

Chapter 6 Business Model Evaluation

STORE Capital

STORE Capital's 2019 V-Formula

The FAANGs

Notes

Chapter 7 Pulling the Corporate Efficiency Levers

Operating Efficiency (O) Sales

Sales

Operating Profit Margin

Operating Profit Margin

Asset Efficiency (A) Business Investment

Business Investment

Maintenance CapEx

Maintenance CapEx

Capital Efficiency (C) OPM Variables

OPM Variables

Six-Shot Economics

Note

Chapter 8 Choosing from Your OPM Options

Designing Your Own OPM

Leasing

Creating a Model to Evaluate OPM Options

Real Estate as an Investment

Note

Chapter 9 Opportunity Cost

Some Opportunity Cost Illustrations

Creating a Model to Evaluate Real Estate Lease Opportunity Costs

Case Study V-Formula. 20% Location Expansion Case

Chapter 10 The Final Form of OPM

OPM Equity

Sustainable Growth Rate

Taking on OPM Equity

Current Equity Rate of Return When You Don't Own the Entire Company

Deciding How Much OPM Equity to Use

Creating a Five-Year Model

Sweetening the Deal

OPM Equity Flavors

OPM Equity Considerations

Note

Chapter 11 A Look at Public Companies

Determining Public Stock Equity Returns

Public Shareholder Business Investment

Adjusting Reported OPM for Assets Leased Rather Than Owned

Walmart

Note

Chapter 12 Animal Spirits

Elon Musk and Tesla

Stock Exchange Differences

Restaurant Case Studies

Lone Star Steakhouse & Saloon

Boston Chicken

Value Investing

Notes

Chapter 13 Mergers and Acquisitions

OPM Capital Options

Solving for Equity and Company Valuation

Valuing a Business in Three Steps

EBITDA Valuation Multiples

M&A Risks and Rewards

M&A Nightmares

GE and M&A-Driven Growth

Focusing on What Matters

Notes

Chapter 14 The Essential Ingredient

The Growing Restaurant Illustration

Designed Structural Change

Technology-Enabled Changes

Core Competency Refinement

Keeping It Simple

Planned vs. Imposed Structural Change

Blockbuster Video

Designed Revolutionary Change

Reengineering the Corporation

Notes

Chapter 15 The Art of the Possible

The Circles of Business Life

Evolving Capital Choices

Value vs. Momentum Investing

Defining a Financial Win

Some Final Thoughts

Notes

Glossary of Terms

The Value Equation Framework. Current Pre-Tax Return on Equity. The V-Formula

The V-Formula Deconstructed

Relative V-Formula for Current Pre-Tax Return on Equity

Equity Valuation Multiple

Equity Value

Equity Market Value Added (EMVA)

Sustainable Growth Rate

Current Equity Rate of Return With Partial Ownership

Market Return on Equity. The Market V-Formula

Company Valuation

Compound EMVA Growth Formula

Acknowledgments

About the Author

Index

WILEY END USER LICENSE AGREEMENT

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Additional Praise forThe Value Equation: A Business Guide to Wealth Creation for Entrepreneurs, Leaders & Investors

“We're living through a historic boom in entrepreneurship. People are starting businesses at record rates. Fortunately, Chris Volk has written us all a manual for success.”

.....

After I started to work at the bank, I became interested in business models. From my earliest days in banking, I began to model out businesses and create projections, which helped me to develop an expertise in business model evaluation. I cut my teeth on Visicalc (the first spreadsheet software for personal computers), graduated to Lotus 123, and later moved on to Excel, which is the prevalent spreadsheet software in use today. My earliest financial models can be described as long and weighty.

The thing about most business models and projections is that they are bound to be wrong. In fact, I commonly saw companies put together “base case,” “best case,” and “worst case” financial model scenarios, which simply gave the model authors the opportunity to be wrong three times. In truth, with just one or two variable changes, business model outcomes can vary by great degrees. Given this high level of variability, I became wedded to sensitivity tables (or “data tables” in Excel), which allowed me to see potential outcomes given a range of values for any two key model inputs. If you created many sensitivity tables, you could incorporate numerous variables, which provided better insight into key model variables and margins for error. The best business models tend to have ample room to make mistakes and yet still create wealth through outsized investor returns.

.....

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