capability. Therefore, advisors have a critical responsibility to leverage governance, relationships, risk, and knowledge (GRRK) in client equity value enhancement (EVE). And business owners can foster success based on the advisors they select to counsel them.
As an example, it's important to seek professionals who are able to discern between economics, accounting, and finance backgrounds for a valuation expert. Each background differs, with financial expertise being more than merely generating or reporting numbers. These professionals must understand what produces results and reduces operational risk while elevating intangible value and what causes equity impairments. Arguably, the ideal valuation expert ought to possess a blend of strategy, operations, finance, and human behavior knowledge.
Further, there is a great difference between risks to an asset and risks within an asset. The prior is often tabled as asset-protection or preservation activity and the latter deals with risks inherent to the asset, its market, and its management.
These considerations would be inherent in any value creation plan. Focus on advisors who are proactive. (Most are reactive.) You may find it eye-opening to ask existing and potential advisors how they differentiate themselves. If you can swap their name or that of their firm with another name, they may not be adequately differentiating the influence of their knowledge and relationships to serve clients.
The ultimate holistic advisory team is likely to focus on elements of governance, relationship, risk and knowledge management and maintenance as a way to create value by leveraging intangible assets. It's not simply a financial capital game. It's a human capital one, too. It's about seeing what's driving operational performance. Values are more than numbers!
These are things an accountant, attorney, wealth advisor, insurance professional, or banker individually may not know – and may be unlikely to ask – so that's why a diverse advisory team is optimal. The ultimate advisory team is one that helps a company play an “A” game versus one that benefits from a company client that is playing their “A” game – a symbiotic versus a parasitic relationship.
The Opportunity is There
Many privately-held businesses were started by Baby Boomers who were contemplating some exit in the mid-2000s. Then, from 2007 to 2012, we saw the Economic Darwinism: Businesses that underperformed were swept out of the market.
Those that survived picked up the remnants of competitors, as fiat capital (U.S. denominated dollars printed and electronically infused through treasury bond sales keeping the market moving through “Quantitative Easing”). Some thrived. These owners now find themselves looking beyond today's operational realities and starting to conceive a strategy that may include the sale of part or 100 percent of their equity.
The best-case scenario is a sale prepared for and at price/terms that makes the equity attractive to sell and able to produce the net proceeds an investor seeks. Rare, but it happens.
This is where my lament “they don't know what they don't know” is derived. Business owners can be blindsided by issues they or their advisors never saw coming like hyper-inflation from too much quantitative easing or an all-out regional war in the Middle East or the impact of oil or water shortages on their business. I have intentionally designed this book to demonstrate that no single perspective is adequate to create and sustain concentrated wealth.
While there are several underlying issues, the theme focuses on unmet critical needs in the professional advisory communities and in multi-generational entrepreneurial families. These knowledge and resource gaps often dilute rather than create value.
This is exacerbated by transactional, technical, and tactical thinking and language that compounds the disconnect between the advised and the well-meaning advisor. Most advisors favor preserving wealth through legal, tax, financial, and allocation strategies. They use terms like optimize. This is an example of doing things right versus doing the right things. Think of the absolutely perfectly dug hole in circumference and depth. Now, what if that perfect hole was unnecessary or in the wrong place?
Exceptional entrepreneurial families have overcome the odds associated with concentrated risk and wealth. Yet, most businesses started without a plan, or the plan is sell more and make a profit.
It stands to reason, they're as unlikely to have a plan when contemplating one of the 6T's. Meanwhile, right now the largest degree of wealth is transferring from the Baby Boomer generation, with the youngest reaching age 50 in 2014.
While families with modest wealth or revenues are not excluded from consideration, the book's focus is on what families have been able or wish to achieve by leveraging their trusted advisors' abilities to scale their company revenues and wealth to $25 million or more.
Governance (issues of culture, codification, and control), relationships (family, business, staff, and advisory), risk (what operational, legal andfinancial factors are overlooked), and knowledge (internal, external, uncommon, IP, policy/procedure, and human capital) are integral.
The book's eleven chapters illustrates that the letters and concepts of GRRK are interconnected. In the aggregate, their influence dramatically changes pricing multiples and economic benefit, proving that value creation is dynamic.
In Chapter 1, we provide some basics about what value is, as a way to lay the groundwork for the information that follows.
In Chapter 2, we explore fundamental trusted advisor relationships overlaid with the notion of concentrated risk and the owners who possess these unique esoteric assets. We provide distinct win-win reasons to operate within a purposeful and collaborative framework of relationships and connections that offers unique value beyond technical know-how.
In Chapter 3, we speak to business owners, providing them food for thought to assess whether they are working in or on their concentrated risk (their business), and challenging them to leverage all the resources they have to understand and to build value.
In Chapter 4, we address the traditional ways various professionals measure risks through their lenses, beginning with a brief list that's common to their perspectives. This provides evidence of the benefit of involving multiple disciplines and their alignment to ensure the big picture can evolve.
In Chapter 5, we focus on the role of governance: what it is, the role culture plays, and a healthy approach to measure, manage, and maximize governance's influence on value.
In Chapter 6, we focus on the role of relationships, assessing the various stakeholders, why they are deeply important, and how they can evolve in healthy ways that can lead to value creation.
In Chapter 7, we define and discuss the role of legal and financial risks, which are more readily found due to the financial metrics: a “warm-up” for the following chapter. Please remember, the lower the risks, the higher the price multiple; and the higher the price multiple, the greater the value.
In Chapter 8, we identify many less easily measured operational risks that also influence human and financial capital.
In Chapter 9, we address the role of knowledge, reflecting on how this human capital intangible provides
