is well supported.
We'll be spending considerable time in Chapters 7 and 8 on risks at the company level, so suffice to say, more robust reports that address legal, financial, and operational risks will examine client and advisory involvement that can both establish a benchmark value, but also are risk factors impacting the value at the asset, entity, and equity levels.
This would also require not only examining the company against itself, which is referred to as a trend analysis, but correctly utilizing industry comparative data to determine the level of operational performance. Such analysis is often based upon industry and company revenues and/or asset size.
This will be addressed in greater length in Chapter 9 for my appraisal brethren and those relying on and reviewing business appraisal reports.
Plugging the Gap
How does so much get missed in the valuation process and why are so many opportunities to create value overlooked? There is plenty of responsibility to spread around. The appraisal profession could do a better job articulating its offerings and uses. The standards of practice could be strengthened. Business owners and executives could seek an investment in quality advisory services.
In Cracking the Value Code, Richard Boulton states: “Boards of directors need information about all assets that drive value so that they can properly discharge their duties of stewardship and governance.”2
The advisors who most commonly serve business owners could strive to better understand the valuation work product and its utility. Peter Drucker, a well-regarded academic and management consultant, states: “If you want to do something new, you have to stop doing something old.” Academia could emphasize the importance of private capital markets and methodologies applied in valuing private companies.
However, another plain truth is most trusted advisors – attorneys, CPAs, bankers, insurers, and so on – suffer from technical myopia. They focus on their products and services and assume another professional will take up where they leave off. “It's not my job” and the risk of losing client revenues because of an unwillingness to learn the merits of other advisors plagues most professions.
We're almost all guilty of this and we suffer as a result. Worse yet, the client suffers the most due to the ad-hoc manner information often received from various advisors' lenses. The way to change this is also fairly straightforward: Owners and advisors need to elevate themselves to create better alignment on behalf of company clients' ecosystems with a focus on creating value. That is what a successful strategy is supposed to achieve: enhanced shareholder value.
The bar needs to be raised. Otherwise, as Michelangelo warned, “The greatest danger for most of us is not that our aim is too high and we miss it, but that it is too low and we reach it.”
It may be best to put people in the same room at the same time, something that will eliminate conflicting advice and facilitate having robust discussions about value creation strategies and their implementation. As will be shared elsewhere in this book, this often means including family, vendors, and clients as part of the holistic approach that becomes embedded in the company's cultural DNA.
Chapter 2
Focus on Trusted Advisors
If an advisor can differentiate by the knowledge and relationships that would allow the business being served to flourish, then the discussion changes when a competitor comes knocking, which they will inevitably do. Your competitor contacts a client and identifies current provider price point. If the client says I pay $250,000 for my annual services, the competitor may offer a $50,000 fee reduction; however, if the client explains his risks are lower, profits are greater, and his value increased by $5,000,000 last year, how many competitors can readily offer a 20-to-1 ($5,000,000/$250,000) return on the relationship? Very, very few.
Let's set the stage. A current, past, or future client has needs and wants. She or he has beaten the long odds and operates a thriving $125 million company. Has the company grown due to unique skills offered by its provider(s)? Or, have the providers grown their billings due to having the good fortune of serving a company that operates very successfully? Perhaps the company has mastered client, vendor, and staff relationships with a culture of empowerment, cohesion, and community. Maybe it has levered the knowledge of several clients, vendors, and key staff to develop a unique knowledge-based product or service.
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