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.
Some Sobering Realities
From the fledging entrepreneur to the seasoned corner-office executive of a global company, growth decisions are made based on “build versus buy.” Build is organic growth, and buy is through merger and acquisition. It comes down to the risks and rewards of the time value of money.
No one chooses to start or acquire a business because they want to fail. Yet, the odds are stacked against even the most capable, regardless of which business path followed. Those who acquire must have adequate understanding of their capital needs (both human and financial) and their optimal utilization. Those who opt to go the angel investor/venture capital–backed route suffer a failure rate north of 90 percent. They often give up equity to their investors and set their sights on achieving hyper-growth as a result of their innovation.
However, those who choose the bootstrapping or “family and friends” funding route face a slightly better but still dismal failure rate near 80 percent within two to five years. They retain their equity, believing their idea will blossom into a sustainable business.
Small businesses ($5 million and lower revenues) have only a 25 percent chance of selling. Larger businesses that are acquired fail to achieve the synergies sought over 80 percent of the time, creating seller's and buyer's remorse. And, within three generations, many family businesses usually cease to exist or have been sold at least 85 percent of the time. Advisors are either part of the solution or observers to these preventable, sobering statistics.
Why do entrepreneurs still pursue the brass ring given these abysmal statistics? They're usually spurred on by the businesses that do succeed – something I call selection bias (ignoring the preponderance that fail). Or, they are either unaware of or oblivious to the high potential of failure – something I refer to as Economic Darwinism. They believe in themselves and their idea, ignoring all potential naysayers. Their demise is often failing to plan, which is a plan to fail.
What does this have to do with value creation? It should be obvious: Those who have achieved significant value are exceptional in the manner in which their investment is measured and managed. Those who overlook these critically important metrics and actions are more apt to fail.
Improving the Odds
It truly does take a village (ecosystem) to build and maintain a successful enterprise, whether an operational business or a portfolio of income-producing real estate. The endgame for most is leqacy and liquidity: that is, to sell or transfer part or all of their equity. Most investors in public companies buy and hold stock looking for capital appreciation (growth) and secondarily yield (income).
Ironically, most private company owners/executives do not know the market value of their companies, nor do their advisors. They have to think more like investors in their companies. Building value is an ongoing process of equity value enhancement, not simply managing sales and profits because they're easier to identify.
Savvy business owners will seek advisors who can best help them create value. Other owners will be complacent,
