Creating Value in a Globalized World
Presentation by Rob Slee, CBA, MA, MBA
Robertson & Foley, Investment Bankers, Charlotte
rob@robertsonfoley.com
CREATING
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The Problem / Opportunity
Most business owners are not
increasing the value of their firms
What can be done to improve this?
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Let’s Review What Is Being Taught
● There is one primary capital market in the U.S.
● Corporate finance theory explains behavior of
the players
● Every business has one true value
● Capital is efficiently allocated and priced
● Going public is the primary goal of a business
owner
But none of this is true!
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Upon Further Review
● Capital markets are segmented in the U.S.
● Various finance theories explain behavior of the players
● Every private business has dozens of correct values at
one time
● Private capital is not efficiently allocated and priced
● More companies will go private than public in the
foreseeable future
A new belief system developing?
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What are the Private Capital Markets?
● The venues where private capital is raised and
private equity interests are exchanged
If you’re sitting here…
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A Tale of Two Markets
Public Markets (Wall St.)
Private Markets (Main St.)
Use of a C corporation
Can be any type entity (S, LLC, etc)
Value is established by a market
Value is established at a point in time
Ready access to public capital markets
No access to public capital markets
Owners have limited liability
Owners have unlimited liability
Owners are well diversified
Owners have one primary asset
Professional management
Owner management
Company has infinite life
Typical company life of one generation
Liquid securities efficiently traded
Illiquid securities inefficiently traded
Profit maximization as goal
Personal wealth creation as goal
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Capital Markets – An Overview
Sales
($millions)
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Small
150
500
Lower
Businesses
Middle
M I d d l e
5.4MM
1,000
Upper
Large
M a r k e t
Companies
300,000
2-3x
4-7x
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2,000
8-9x
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10-11x
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>12x
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Different Theories for Different Segments
Sales
($millions)
5
Small
150
500
Lower
Businesses
Middle
M I d d l e
1,000
Upper
Large
M a r k e t
Companies
Small Company
Markets Theory
Private Capital Markets Theory
Corporate Finance Theory
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Dickens Déjà Vu?
● Capitalism may be the most successful export
in US history
● It’s the best of times for companies with conceptual
business models (how you organize to meet your goals)
● It’s the worst of times for companies with
provincial business models
● 70% of private business owners are NOT increasing the
value of their firms
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What’s an Owner to Do?
I.
II.
III.
Learn to think and act strategically
Raise his/her Private Finance IQ
Play to win by the New Rules of wealth creation
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I. The Strategy Thing
Every so often the rules of business change
Industrial Age…
Information Age…
Conceptual Age
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What Game Are You Playing?
The game of business:
Information Age
Conceptual Age
Left brain
Tactical
MBAs & wonks
Checkers
Left and right brain
Strategic
Designers and deliverers
Chess
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Who or What is Holding You Back?
● Most owners spend less than 10% of their time on
strategic thinking (strategy is what you do to meet your goals)
● In the Conceptual Age, operational effectiveness is the
starting point
● What’s the main constraint every business faces?
● Whoever sits behind the owner’s desk!
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Tactical vs. Strategic Thinking
Tactical
Strategic
Sergeant
Player
Operations
Sales
General
Coach
Business model
Marketing
Does all of this matter to creating wealth?
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II. Private Finance
● The study of how private companies make investment
and financing decisions
● Value Relativity: Value is relative to the reason for
an appraisal
● The Bizarre Bazaar: Private capital is allocated in a
bazaar
● Transfer Spectrum: Business transfer comprises a
spectrum of alternatives
● You are lost until you understand the integrated
structure of private finance (a story might help)
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On the Lighter Side
Investment Banker Man
The harmonic mean of the public
control premiums derives an implied
minority discount that is
multiplicatively, not additively,
applied to the unadjusted …
Slee3
Why it’s so difficult to value a business appraiser’s opinion
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Value Relativity
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Einstein and his theory of relativity
Slee’s theory of value relativity
The reason for an appraisal leads to a value world
Every private company has dozens of correct values
at one point in time
● Why? Not because I say so – but because Authorities
say it is so
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A Few Value Worlds
● Market Value – what the open market says the
business is worth (Asset, Financial, and Synergy
Subworlds)
● Fair Market Value – what the IRS/Courts say it is worth
● Owner Value – what you say it is worth
● Investor Value – what an investor says it is worth
● Collateral Value – what the bank says it is worth
● Why is there relativity? Without an active trading
market, perspective of the players matters
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The Bizarre Bazaar
Success in the private capital bazaar requires:
(BTW, why a bazaar and not a supermarket?)
● Understanding the structure and rules of the bazaar
● Being prepared for financial hand-to-hand combat
● Realizing that capital providers constantly move their
tents
● Creating capital solutions one deal at a time
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Structure of the Bazaar
● Private capital owner motives include a desire: for few
shareholders; to stretch equity; to eliminate personal
guarantees; to manage business – not balance sheet
● Capital is allocated based on the credit requirements of
the providers (credit box)
● Capital providers have unique return expectations
● Return expectations are all-in rates (not just stated
interest rates)
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On the Lighter Side
Investment Banker Man
Let me get this straight, the
all-in cost to factor my
client’s receivables is
Prime +3%
Slee3
Commercial truth-in-lending – when Prime hits 30%
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0
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Factoring S
Factoring M
Angel
V/C
Factoring L
PEG
EMC
DMC
ABL3
Venture Leasing
Spec Leasing
EWCP
ABL2
Bank C/L
CAPLine
Captive Leasing
Bank Leasing
7(a)
ABL1
B&I
504
IRBs
Expected Returns (%)
Private Capital Access Line
60
50
40
30
20
10
Capital Access Points
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Business Transfer
● Business transfer reflects all possible ways or methods
to transfer or exchange a private business interest
● An owner’s transfer motive selects a transfer channel
(e.g., Employee channel)
● Each channel contains numerous transfer methods
(e.g., ESOP or MBO)
● Transfer methods select value worlds!
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Business Transfer Spectrum
TRANSFER
TRANSFER
Employees
Charitable
Trusts
Family
MOTIVES
CHANNELS
Co-Owners
T R A N S F E R
ESOPs
Management
Buyouts/Ins
Phantom
Stock
Stock Appreciation Rights
Charitable
Remainder
Trusts
Charitable
Lead Trusts
Outright
Gifts
SCINs
Annuities
GRATs
FLPs
IDGTs
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VALUE
Outside
[Retire]
[Continue]
Public
M E T H O D S
Negotiated
One-Step
Private
Auctions
Two-Step
Private
Auctions
Buy/Sell
Russian
Roulette
Dutch
Auction
Right of
First
Refusal
INTERNAL
TRANSFERS
CREATING
Outside
Consolidate
Roll-ups
Buy and
Build
Recapitalizations
Initial Public
Offerings
Direct Public
Offerings
Reverse
Mergers
Going
Private
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Owner Motives Matter
Possible values for PrivateCo:
Method
Value World
Value
Buy/Sell
MBO
ESOP
Recap
Auction
IPO
Asset Market Value
Investment Value
Fair Market Value
Financial Market Value
Synergy Market Value
Public Value
$ 2.4 MM
$ 7.5 MM
$ 9.2 MM
$12.0 MM
$16.6 MM
Ask Google
Business Owners Choose a Transfer Value!
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III. New Rules of Wealth Creation
1. Every person working in or for a business must
create wealth to remain employed
2. Job security is a function of the number of wealthcreating skill sets that are possessed
3. A company can expand its returns via arbitrage if its
managers understand how to exploit market
opportunities.
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III. New Rules
(cont)
4. Companies should adopt conceptual business models to
create wealth.
5. Owners need to raise their Private Finance IQ’s to make
better investment and financing decisions (and thereby
create wealth).
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The Midas Touch
● Most owners know the game has changed, but
they don’t know how to win going forward
● Midas Managers have figured it out
● Midas Managers have always existed and have always
created wealth
● Let’s review the essence of Midas
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Essence of Midas
Midas Managers are:
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Control freaks in pursuit of a goal
Contrarians
Strategists who delegate
Able to “look just over the horizon”
Capable of understanding and exploiting the
motives of others
● Driven to create wealth
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The Wealth Matrix
Income
Market
Position
Risk
Arbitrage
M
Business Models
S
Private Finance
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Let’s Play Some Wealth Creation Games
1.
2.
3.
4.
5.
The Valuable View Game
The Consolidation Math Game
The Create a Niche Conglomerate Game
The Productize Your Business Game
The Design and Deliver Game
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1. The Valuable View Game
Small
Middle
Expected Returns
50%
40%
30%
20%
Large
10%
0%
Debt
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1. How to Get Viewed on a Better Line
1.
2.
3.
4.
5.
Simplify the business model
Develop a recurring revenue/income stream
Institutionalize the business (mgmt, systems, etc.)
Create transparency on all fronts
Rationalize the process chain
End Result: Better/cheaper access to capital plus a
higher acquisition multiple
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2. Consolidation Math Game
Sales
($millions)
5
Small
150
500
Lower
Businesses
Middle
M I d d l e
2-3x
4-7x
CREATING
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Upper
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Large
M a r k e t
8-9x
VALUE
1,000
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Companies
10-11x
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>12x
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2. The Rules of this Game
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Identify your market segment
You need a platform company
Determine which competitors are not adding value
Go after all of them at once
Use the Head-’n-Shoulders approach
The toughest part is integrating the operations
Don’t fall in love with the result
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3. Create a Niche Conglomerate
● Take what globalization will give you – become a
niche-aholic
● Successful middle market firms are amalgams of
niches
● Hang your niches off an intellectual capital tree
● Spend 50% of your time developing the next niche
● Ideal company: $15 MM in sales, comprised of 5-6
niches, EBITDA of $4-5 MM
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3. Niche Building
(Rob’s Intellectual Capital Tree)
Seminars
Preach
Advise
Write
Create
Books
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4. Productize Your Business Game
● Cimtec Automation is a Charlotte value-added
distributor of factory automation
● The managers and I bought it from Unifi in 2002
● Project engineering equates to no value creation
because the market wants/values recurring
revenue/income streams
● We are currently productizing our offerings
● This is the Head-’n-Shoulders approach again
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5. Design and Deliver Game
● The new global business model calls for controlling
rather than owning your process chain (own only
your intellectual capital)
● This strategy works even in depressed industries
● Take the Textiles industry for example. We have
clients with annual sales of more than $50MM;
EBITDA of more than $10MM; fewer than 15
employees.
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5. Design and Deliver
(Example)
Robertson & Foley’s Process Chain
The Old Chain:
OWN EVERY STEP OF THE PROCESS (INCLUDING EMPLOYEES/OTHER)
The New Chain:
MARKET
ENGINEER
OUTSOURCE
DELIVER
The hardest part is letting go of what worked 10-20 years ago
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What’s Stopping You?
● Creating wealth is a choice
● Most owners seek only a lifestyle – not wealth
● The Conceptual Age threatens to destroy many
lifestyle businesses
● Owners need to reconceptualize themselves and their
business models
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Where Do You Go from Here?
● Answer the following question:
- If we were meeting 3 years from now, what would
have to happen for you to feel like you’ve been
successful?
● Write down the answers and post them
● Choose strategies that will get you there
● By all means, delegate the stuff you hate, and enjoy
meeting your goals!
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Après Wealth Creation
Once you create wealth, you need to
realize it…
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