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Creating Value in a Globalized World
Presentation by Rob Slee, CBA, MA, MBA
Robertson & Foley, Investment Bankers, Charlotte
rob@robertsonfoley.com
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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
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Capital Markets – An Overview
Sales
($millions)
5 150 500 1,000
Small Lower Middle Upper Large
Businesses M I d d l e M a r k e t Companies
2-3x 4-7x 8-9x 10-11x >12x
5.4MM 300,000 2,000
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Different Theories for Different Segments
Sales
($millions)
5 150 500 1,000
Small Lower Middle Upper Large
Businesses M I d d l e 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. Learn to think and act strategically
II. Raise his/her Private Finance IQ
III. 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
Information Age…
Industrial Age…
Conceptual Age
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What Game Are You Playing?
The game of business:
Information Age Conceptual Age
Left brain Left and right brain
Tactical Strategic
MBAs & wonks Designers and deliverers
Checkers 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
Does all of this matter to creating wealth?
Tactical Strategic
Sergeant General
Player Coach
Operations Business model
Sales Marketing
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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
Why it’s so difficult to value a business appraiser’s opinion
Slee3
The harmonic mean of the public control premiums derives an implied minority discount that is multiplicatively, not additively, applied to the unadjusted …
Investment Banker Man
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Value Relativity
● 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
Commercial truth-in-lending – when Prime hits 30%
Slee3
Let me get this straight, the all-in cost to factor my client’s receivables is Prime +3%
Investment Banker Man
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Private Capital Access Line
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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
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Owner Motives Matter
Method
Value World
Value
Possible values for PrivateCo:
Buy/Sell Asset Market Value $ 2.4 MM
MBO Investment Value $ 7.5 MM
ESOP Fair Market Value $ 9.2 MM
Recap Financial Market Value $12.0 MM
Auction Synergy Market Value $16.6 MM
IPO Public Value 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 wealth-
creating 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:
● 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
Arbitrage
Business Models
Private Finance
Income
Risk
Market
Position
M I D A S
S T R A T E G I E S
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Let’s Play Some Wealth Creation Games
1. The Valuable View Game
2. The Consolidation Math Game
3. The Create a Niche Conglomerate Game
4. The Productize Your Business Game
5. The Design and Deliver Game
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1. The Valuable View Game
50%
40%
30%
20%
10%
0%
Expected Returns
Small
Middle
Large
Debt Mezzanine Equity
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1. How to Get Viewed on a Better Line
1. Simplify the business model
2. Develop a recurring revenue/income stream
3. Institutionalize the business (mgmt, systems, etc.)
4. Create transparency on all fronts
5. 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)
5 150 500 1,000
2-3x 4-7x 8-9x 10-11x >12x
Small Lower Middle Upper Large
Businesses M I d d l e M a r k e t Companies
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2. The Rules of this Game
● 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)
Preach
Write
Create
Engr.
Seminars
Books
Own Stuff
Advise
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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…