Читать книгу Equity Value Enhancement - Sheeler Carl L. - Страница 7

An investment banker introduced me to her attorney friend who had a client whose trust held shares in a 10-figure annual sales distributor. Most of the equity was derived from her mother's passing. Her mother's brother (her uncle) controlled both the company and her trust. Her uncle retained a national appraisal firm to substantiate an unusually low value both for estate tax purposes and to use the value to negotiate a buyout of her brother's and her shares. Both she and her brother, who had his own counsel, felt they were being slighted. They alleged their uncle was underreporting company performance and assets held. They alleged he had breached his fiduciary duty. They were worried about a drawn-out and costly confrontation with their uncle.

They just wanted what was bequeathed to them. This was a six-figure retention, which would balloon to a seven-figure engagement, which would allow me to acquire a dream ranch that offered equine therapy for both veterans and a retreat for business owners as well as well as solitude for my wife to do her art.

This book starts with this story because it sums up nicely how to distinguish between a “check-the-box” analyst who is evaluated by hourly rates and the expert who understands the premium placed upon wisdom and mastery that solves irretraceable problems. Think of Showtimes' Ray Donovan (Liev Schreiber) as a “fixer” of messes (without the gun).

Compare this with a recent communication with an attorney who had expressed on a listserv she felt the four-figure fee for an appraisal was too high after researching appraisal firms on the Internet. The rationale was the client would “know” the right amount because he would accept the buyer's offer. Why spend the money? Counsel was certain she understood fair market value.

I tried to dissuade her from her premise by using the following example: “If the seller was first offered $100,000, but held out and received $200,000, is this the value of the asset?” It may be what it is worth to the seller, but that is not necessarily the value of the asset. The buyer may have more experience and knows the asset is worth $1,000,000. The buyer would have been willing to pay as much as $800,000. So, the “price” differential of $600,000 ($800,000 – $200,000) was money left on the table. And, if the seller had found out? A flawed premise is a transaction between two parties establishes arm's-length value. The analyst is usually retained to identify value, assuming a reasonable exposure and marketing period with knowledge and access to capital under no duress. The notional investors are typically assumed to be a pool of transactions examining both the buy and sell motivations so intrinsic or synergistic value is isolated.

I used another example: “If legal services fees came to $10,000 and the dispute was over property found to be worth $10,000, would the client have overpaid for the services? Conversely, if the fee was $10,000 and the benefit of the dispute was $1,000,000, has the client underpaid?” The point is there is a difference between value, price, cost, and worth.

The examples illustrate that an hourly rate alone only meets the threshold of cost for services, where the value received may not be understood or appreciated by clients. They may commoditize services and will be resistant to fees if nothing above common knowledge is received. The advisor has a duty to articulate the value provided and not solely the price. Otherwise, the advisor is just as likely to minimize fees for services, making no distinction between good and great services.

The optics of the previous examples is understandable because professional services deliver human capital intangibles. What does good look like? This has long been the case for business valuation services. It is in large part why writing this book was important not only to my practice but to all professions and those who retain our knowledge and relationships.

The valuation community is still evolving. Some professionals and their entrepreneurial clients understand the merits of a well-crafted appraisal report with the associated intellectual rigor and research. I salute those who do and who are willing to pay a premium for quality work. This reinforces competence over commoditization.

For the reader who is an appraiser, she or he may be perfectly happy performing more routine work product. For the balance, I shall demonstrate there is more than simply identifying and measuring risk to benchmark business and equity values.

There is a greater calling to provide equity value enhancement (EVE). This is the premise of risk management and opportunity optimization, and the elevated ability to master disputes where risk is mitigated by both measuring the impact of risks existence and then to assist in their minimization or elimination. This is common in matters of alleged value impairment (“damages” and “discounts”).

Our audience is the founders, families, boards, and C-suite of private mid-market through small-cap public companies, private equity, investors, and their trusted advisors. Our goal is to articulate how governance, relationships, risks, and knowledge (GRRK) allows the reader to become a strategic value architect and a chief-of-staff who not only measures but can manage, facilitate, create, and maximize company intangible assets value through the leverage and alignment of human and financial capital. Only then is real value created above the assemblage of tangible assets.

Why GRRK? Successful businesses and entrepreneurial families often see their concentrated wealth as part of an ecosystem of family members, staff, client, vendor, and advisor “constituents.” They do more than consider revenues and profits. They focus on the family's future expectations and harness a culture that goes beyond daily challenges. It's when they are bogged down by the more familiar, yet less productive daily blocking and tackling, that they plateau and often seek to minimize advisory expenditures versus seeking to leverage the advisor's time and talent investment. Protecting their asset becomes defensive versus embracing innovation and remaining on the offensive where reducing risk provides more time and resources to sense and seize opportunity for value growth.

Supersized, stellar growth occurs because these unique executives, founders/families, advisors, and involved constituents foster value creation by harnessing their collective uncommon knowledge and relationships (human capital). This is why those who harness the role of steward, chief-of-staff, and/or strategic value architect thrive, not just survive. Since value creation is dynamic, advisors who align with others are most likely to assist in achieving it.

Expressed differently, the wealthy often get richer not solely from hard work and competent concentrated risk management. They access unique opportunities often unknown to others. It affirms the notion of not only what you know, but whom you know and what they know. This is why “connectors” are much different than one-off isolated advisors

Steward-leaders have a culture and a strategy that assures success. Success is more than wealth. It is earned significance and respect. So, we have to assist in answering, “How are you getting from here to there?” We then identify resource gaps that may derail progress. If we assist in growth and transition, we have a seat at their table – one that is on the same side as the decision makers sit. We ask tough questions and find independent solutions and options. As important, we just don't have a strategic plan. We have a plan that's executed!

Knowledge and resource gaps occur. Sometimes there is a “bubble” or “silo” around and/or between each constituency. This serves to stifle innovation, growth, and profitability while failing to leverage opportunities or mitigate concentrated risk. This becomes evident when thinking is solely tactical and technical. Such thinking is often transactional and commoditized. It contributes to stagnation versus enduring proactive, strategic, and holistic planning that fosters growth.

As I wrote this book, there were significant market forces in play such as changes in capital availability and increased volatility of marketable securities that define in part how risk is measured. These factors do not impede twenty-first century innovations like the cloud or 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.