Value Maps E-Book

Warren D. Miller

• Herausgeber: John Wiley & Sons
• Kategorie: Fachliteratur
• Sprache: Englisch

Seitenzahl: 652

Veröffentlichungsjahr: 2010

Beschreibung

Praise for VALUE MAPS "Equivocator, Explorer, Experimenter, Exploiter, Extender--Chapter 12 might be well served as mandatory reading for all subject matter experts! SPARC is not a valuation, per se, but rather a separate consulting engagement that might interest a client--especially if that client is preparing for a sale or planning an exit strategy. Miller has taken the good ideas from five disciplines and married them with value enhancement, creating what could become a very good 'add-on' consulting engagement. NACVA recommends, and looks forward to, further dialogue related to this new approach. This book will open your eyes to new opportunities." --Parnell Black, MBA, CPA, CVA, Chief Executive Officer, National Association of Certified Valuation Analysts (NACVA) "No one illuminates the murky intersection where business strategy and private company value creation meet better than Warren Miller. Now he's focused his extensive professional training and real-world experience to produce this intellectually rich, yet down-to-earth and fun-to-read road map we can all use. Business owners and leaders, financial analysts, management consultants, wealth managers, CPAs, business brokers, private equity investors, business appraisers--no one should plan to increase the value of an enterprise without Value Maps in their passenger seat." --David Foster, CEO, Business Valuation Resources "Private-equity analysts do not often come across scholarly and technical professional reading laced with laugh-out-loud moments! Yet this is exactly what one finds in Value Maps. Warren Miller's advice stems from his career as a finance executive, a CPA, a valuation analyst, and a 'recovering academic.' With pitch-perfect balance, Warren has created both a must-have professional reference guide and a best-practices road map designed to enhance the profitability of your client's business and your own--all in a very readable style with just a 'spoon-full of sugar.' Enjoy the read!" --Gary M. Karlitz, ASA, CPA, Partner-in-Charge, Valuation Services, Forensic Services, and Forensic Accounting, Citrin Cooperman & Company, LLP "Extremely readable, with numerous real-world examples--valuation specialists who don't read this book will soon be looking for a new profession. Miller takes the term 'valuation' to new levels, suggesting that appraisers can indeed add real value to their clients' businesses. Clients should demand that a valuation professional read this book before he or she will be hired." --Alfred M. King, Vice Chairman, Marshall & Stevens, Inc.

Leseprobe

Table of Contents

Title Page

Copyright Page

Dedication

Preface

The Journey

About This Book

Software and Web Site

Acknowledgements

About The Web Site

List of Acronyms

PART I - CORNERSTONES

CHAPTER 1 - Why a New Approach Is Needed

Valuation as Craft

The State of Our Craft

Cause and Effect: What and Why

Multidisciplinary Tools for Analyzing Value Creation

Parameters of Valuation

What We Know about Risk

Components of Risk

A Framework for Unsystematic Risk

Unlocking Business Wealth

Summary

Additional Reading

CHAPTER 2 - Tools from Strategic Management

History

Perspective

Valuation Tools

Strategic Intent

Generic Competitive Strategies

Resources

Competitive Analysis

Distinctive versus Sustained Competitive Advantage

VRIO

Customer Satisfaction Surveys

Diversification

Unlocking Business Wealth

Summary

Additional Reading

CHAPTER 3 - Tools from Industrial Organization

Perspective

Tenets

Tools

Unlocking Business Wealth

Summary

Additional Reading

CHAPTER 4 - Tools from Organization Theory

Perspective

Tenets

Tools

Unlocking Business Wealth

Summary

Additional Reading

CHAPTER 5 - Tools from Evolutionary Economics

Perspective

Tenets

Tools

Unlocking Business Wealth

Summary

Additional Reading

CHAPTER 6 - Tools from Austrian Economics

Perspective

Tenets

Tools

Unlocking Business Wealth

Summary

Recommended Reading

PART II - POURING THE FOUNDATION

CHAPTER 7 - The Straight Scoop on Value Drivers

Definition

Value Drivers versus Balanced Scorecards

Why Value Drivers Matter

The Regenerative Power of Capitalism

Assessing Durability

Summary

Additional Reading

CHAPTER 8 - The “OT” in SWOT Analysis: The Macroenvironment

Defining the Domain

Unit of Analysis

Trilevel Unsystematic Risk Framework

History and Background

Why Does the Macroenvironment Matter?

The Forces

Summary

Additional Reading

CHAPTER 9 - The “OT” in SWOT Analysis: The Domain

The Roots of Domain Analysis

Oligopolies Large and Small

Price Competition in an Oligopoly

Published Industry Risk Premiums

The Domain

Summary

Additional Reading

Appendix 9A - Competitive Analysis and Estimating Market Share

CHAPTER 10 - Getting to “Why”: Analyses, Composites, and On-Site Interviews

Financial Ratios

A Key Metric

Finding Sector-Specific Metrics

The Analysis

How to Construct a Composite

Prepping for the On-Site Interviews

Conducting the On-Site Interviews

Summary

CHAPTER 11 - The “SW” in SWOT Analysis: The Company and SPARC

Cause-and-Effect Relationships

Value Drivers and Value Destroyers

Assessing Durability of Advantage

Back to VRIO

Summary

Appendix 11A - Bringing It All Together: Quantifying Unsystematic Risk

CHAPTER 12 - SPARC Archetypes among Small and Medium-Sized Enterprises

Exploiter and Extender

Explorer and Experimenter

Equivocator

Summary

PART III - TALES FROM THE FIRING LINE

CHAPTER 13 - Construction and Manufacturing

Construction

Specialty Publishing I

Specialty Publishing II

Specialty Manufacturing

Packaging

CHAPTER 14 - Business to Business

Safety Equipment/Supplies

Industrial Supply

Construction Materials

Antique Building Materials Reclamation

CHAPTER 15 - Transportation

Transportation Collection Services

LTL Trucking

Freight Forwarding

CHAPTER 16 - Specialty Retailing

Jewelry I

Jewelry II

Building Materials

Pharmacy

CHAPTER 17 - Services

Outplacement Services

Executive Search

Private Equity

Investment Banking

Dental Lab

Quick-Lube Services

PART IV - PRACTICE MANAGEMENT

CHAPTER 18 - The Engagement Process

When Can an Engagement Include a Value Map?

Finding Good Clients

Avoiding Problem Clients

Marketing and Selling the Work

The “Shake-’n’-Howdy” Visit

Pricing the Engagement

Engagement Letter 1

Highlights of Engagement Letter 1

Managing Expectations

Engagement Letter 2

Summary

CHAPTER 19 - Working with Clients

A Few Words about Family Systems

Processes

How Not to Do It

How (Else) Not to Do It

Start at the Beginning

Think Like a Buyer

Planning the Engagement

As the Process Unfolds

Winding Up the Value-Mapping Process

Summary

Additional Reading

CHAPTER 20 - IFRS, IVSC, and Value Maps

The Valuation Process Outside the United States

The Cost of Capital Outside the United States

Gathering Data Outside the United States

Summary

CHAPTER 21 - Epilogue: The Future for Value-Mapping Services

The Future for Valuation Services

Marketing Matters

That Special Cadre Dedicated to Delivering Value to Clients

Closing Words

Bibliography

Index

Copyright © 2010 by John Wiley & Sons, Inc. All rights reserved.

Published by John Wiley & Sons, Inc., Hoboken, New Jersey.

Published simultaneously in Canada.

No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, [phone], fax [phone], or on the web at www.copyright.com. Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, [phone], fax [phone], or online at www.wiley.com/go/permissions.

Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book and specifically disclaim any implied warranties of merchantability or fitness for a particular purpose. No warranty may be created or extended by sales representatives or written sales materials. The advice and strategies contained herein may not be suitable for your situation. You should consult with a professional where appropriate. Neither the publisher nor author shall be liable for any loss of profit or any other commercial damages, including but not limited to special, incidental, consequential, or other damages.

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Library of Congress Cataloging-in-Publication Data:

Miller, Warren D., 1943-

Value maps : valuation tools that unlock business wealth / Warren D. Miller.

p. cm.

Includes index.

ISBN 978-0-470-43756-8 (cloth)

1. Business enterprises-Valuation. 2. Corporations-Valuation. I. Title.

HG4028.V3.M55 2010

658.15′ 5-dc

22 2010004696

To my bride and loving spouse, Dorothy Beckert

Preface

From conception to publication, this book had a gestation period of almost 17 years. Not until August 2005 did it finally begin to take on a life of its own. Even then, another three years of rethinking, reanalyzing, and reframing went by before I decided I was ready to commit to writing this. For me, book-writing includes, in roughly equal parts, aspects of writing valuation reports, giving birth, and mud-wrestling. (I can only imagine the giving-birth experience, of course.) Those who have written a book know that it is a nontrivial undertaking. It is harder and takes longer than the first-time author expects. So it was with me.

The Journey

Like some in this field, I came to valuation by accident. After a checkered career as an internal auditor (Union Pacific Corporation), staff accountant (Borg-Warner Corporation), and chief financial officer (United Video Satellite Group, then United Video Inc.), I did a five-year stint as an academic in strategic management at Oklahoma State University (OSU) and the University of Oklahoma. I completed all of my Ph.D. coursework at OSU. Like marriage and children, doctoral programs change participants’ lives, and I was no exception. Among other changes in my perspective, I became a visceral opponent of the existence of undergraduate business education, despite the fact that my undergrad degree is in business. With rare exceptions—the McIntire School of Commerce at the University of Virginia is one—undergraduate business curricula have too little education and too much training.

The problem that creates is that training does not teach one how to think, only how to do. Done right, education teaches thinking skills. So, if the economic world changes and business no longer has a need for as many, say, accountants as it used to need, those who have been doing accounting for 10, 20, or 30 years and have never thought about anything else are up a creek. Think of the displaced auto workers in Michigan and former steelworkers in Pennsylvania.

The doctoral courses I took were game-changers for me. My dim view of economics changed when I was introduced to industrial organization (IO). I also had an unwarranted and unrealistic perception of the value of accounting’s contribution to enterprise, doubtless because I had done a lot of it. Graduate school taught me that strategy and economics mattered a whole lot more.

If I had to boil down my incomplete Ph.D. experience into two takeaways, they are:

1. After tens of thousands of published research papers from hardworking scholars doing difficult and demanding work, we still know very little about how companies do what they do. Evidence of this shows up in the low R2s from hypothesis-testing. After all, 1 - R2 is the percentage of variance not explained by the variables in the test. I have seen highly rated dissertations with R2s of .25. That means that three-quarters of the variance was unexplained.

2. For anyone doing complex or interdisciplinary work in the non-academic world, there is no substitute for good theory. Confirmation of this lies in the repeating question that few valuation reports can answer: Why? Why is the subject company’s inventory turnover one-quarter (or twice) the industry average? Why does the client company assert that its employees are its most important asset, yet in its most recent year it issued 134 W-2s for jobs done by its full complement of 35 employees? At a company that’s been in business for over 20 years, why is every payday an administrative train wreck?

The reports don’t explain why because their authors don’t know why. One reason they don’t is that they rely on traditional valuation tools. Another is that some in our field confuse theory with a half-baked idea. “Well, that’s thuh thee-ree,” they snort, contempt dripping from every syllable. They seem not to understand that valuing a company for whose securities there are no active markets is a damnably difficult undertaking. Colleagues who have valued both public and private companies tell me that valuing private equity is several magnitudes more difficult. I believe them.

While some knowledge of finance and accounting is essential, I quickly concluded that even an encyclopedic grasp of those topics was inadequate. I also saw that in valuing small and medium-sized enterprises (SMEs), getting my arms around unsystematic risk was going to consume the lion’s share of my time. We had some size-premium data from Ibbotson, but that was all. The valuation community had no other data because we had no framework around which to gather it. Without data, there can be no hypothesis-testing. Without such testing, we lack for good theory.

Recognizing the need for a framework that gave me a baseline series of questions to ask about unsystematic risk, I immediately combined the General Electric four-sided model (see Chapter 8) with Porter’s five-forces framework (see Chapter 9). That gave me a way to organize my thinking about external influences on a company’s performance. These constituted my first iteration of the “OT” of SWOT (strengths, weaknesses, opportunities, threats) analysis. The challenge was to find (or create) the “SW” piece for the framework.

About 90 minutes into the first day of my first valuation course from the American Society of Appraisers, an instructor put up an overhead transparency (not much PowerPoint in use then)—the Porter framework. I almost fell out of my chair. Five long, stressful, miserable, poverty-stricken years as a Ph.D. student flashed before me. That moment confirmed that I was on the right track: There was a place for strategic management, IO, and organization theory in valuation. I later found that two other disciplines within economics also offered useful tools for valuation professionals: evolutionary economics and Austrian economics.

Valuing private equity offered ample opportunity to use much of the nonvaluation knowledge I already had in order to get at underlying causes of why a company did some things really well or really badly. I believed from the beginning that, if I couldn’t explain why, then I was unlikely to get a reasonable valuation estimate, except through dumb luck. Even then, my report would lack the credibility essential for a valuation craftsman.

Later in my search for the “SW” component, I immersed myself in evolutionary economics with Nelson and Winter’s classic, An Evolutionary Theory of Economic Change. I had had some exposure to it in one of my doctoral courses, but I had not given the book the time and energy it deserved. A few years later I read “The ‘Austrian’ School of Strategy.”1 That paper led me to Austrian economics, which connected most of the random dots that traditional economics had left floating around in my head.2

I still did not have the “SW” piece, though. I reviewed each of my own valuation reports and those I had done in collaboration with others. I made a list of the various causes that I had found that underpinned the effects (metrics and ratios) of financial performance. I looked for patterns in the causes and saw a few. I stayed after it and, in summer 2005, was able to classify the causes into a five-part framework that, after some what-iffing, became SPARC (strategy, people, architecture, routines, culture). In the meantime, the four-sided GE model of the macroenvironment had become hexagonal, as had the framework for domain analysis. On September 26, 2005, on the back of a cocktail napkin at Mr. K’s, a first-rate Chinese restaurant at 51st and Lexington Avenue in midtown Manhattan, I drew two concentric hexagons with a triangle inside circumscribing five SPARC blocks, labeled them, and handed the napkin to Jim Travis, a colleague from Chicago.

“How’s that look?” I asked.

“Cool. What is it?” he said.

As I explained, he nodded. What I drew that night has changed only slightly since then. It is a robust framework that we use in every engagement. It is no exaggeration to say that we would be lost without it. It would probably take me two or three times as long to do a valuation half as good if I did not have that framework.

About This Book

If you are a valuation professional or consultant with an interest in helping SMEs increase their value, this book is for you. If you are anyone else, welcome. The book might be for you, too, but you can make that call.

The 21 chapters contained herein are divided into four parts. Part One, Cornerstones, leads off with a chapter that makes the case for why a new approach to valuation is needed. Chapters 2 through 6 are devoted to discussing tools from the five disciplines that undergird the new approach: strategic management, industrial organization, organization theory, evolutionary economics, and Austrian economics.

In Part Two, Pouring the Foundation, we begin the move from theory to practice. The part leads with a chapter on valuation drivers, a much-misunderstood topic in the valuation community. Chapters on assessing risk in the macroenvironment and the domain follow. Chapter 10, “Getting to Why,” covers analyses, composites, and on-site interviews. Chapter 11 is, in my view, the most important chapter in the book because its focus is the company. The part closes with a short chapter about SPARC archetypes. These chapters are the how-tos.

Part Three is entitled Tales from the Firing Line. The five chapters here comprise 22 vignettes taken from actual valuation and consulting engagements. These are disguised stories, of course. But they are real, and they happened. Any seasoned valuation professional will swear that Hollywood script-writers could never make up the stuff we see and hear, and these vignettes are further proof of that if any were needed.

Part Four is called Practice Management. In my view, this area is an understudied, underexplicated topic. The chapters here deal with the engagement process, working with clients in value-mapping engagements, and an international perspective on value maps. The part and the book end with a chapter that examines the future of value enhancement services.

Software and Web Site

John Wiley & Sons provides a Web site on which purchasers of this book can access the proprietary Excel templates that take you through the value-mapping process. These templates have some set (i.e., unchangeable) features, but they have some flexibility, too. After all, valuation is about “facts and circumstances,” so a degree of customization capability is essential. See the About the Web Site section for more information.

Acknowledgements

The debt I owe to colleagues, mentors, friends, and family is enormous. The support and encouragement of one’s colleagues is high praise, as any recipient will attest. Gary M. Karlitz, ASA, and Mandeep Sihota, CFA (both of Citrin Cooperman & Company, LLP), Don M. Drysdale (Drysdale Valuation, LLC), Ed Moran (now retired from Horne, LLP), and Sarah von Helfenstein, AVA (Braver and Company, LLP), have been especially helpful, upbeat, and supportive. The many professionals who have attended classes I’ve taught, listened to presentations I’ve made at conferences, and responded to articles I’ve written are too numerous to mention, but each is appreciated and saluted here.

One does not learn about good theory without good scholars as mentors. I am especially blessed to be a student and friend of Professor Ben Oviatt, now retired from Georgia State University. Ben and I go back 26 years. He and his spouse, Judy, have put Dorothy and me up in their home. Ben was my first strategy professor. He is a wonderful teacher and sterling human being. He has also listened to my ideas and raised substantive questions that forced me to improve on them. Without Ben’s patient guidance and friendship, I doubt this book would have ever seen the light of day.

Professor Joe Mahoney of the University of Illinois, Urbana-Champaign, is a model for many young scholars and at least one old one. He is a man whose work I have admired for almost two decades. If there is a book that Joe has not read, I have never discovered it. And I don’t mean just books on strategy and economics. I mean books. The man is a mobile branch of the Library of Congress and a source of bountiful insights, thoughtful perspectives, understated humor, and infinite patience. He and I have spent many hours on the telephone discussing papers, constructs, and the craft of research. Joe and his bride, Professor Jeanne Connell, are the loveliest and most generous of people. Dorothy and I are fortunate to have them as friends.

Professor Peter Klein, blogger without peer3 and associate director of the Contracting and Organizations Research Institute at the University of Missouri, Columbia, is a dear friend, stunning intellect, and unbelievable reservoir of erudition and good sense. I “met” Peter by sending him an e-mail when I became a serious student of Austrian economics. He has been unfailingly generous with his time and ideas. Peter has read and commented on my abstracts and other writing. I am also fortunate that he has signed on as an occasional subcontractor for Beckmill Research, LLC. Who else among us can claim a subcontractor with a Nobel laureate as the chair of his dissertation committee? (Oliver Williamson, 2009 co-winner, chaired Peter’s.) What I most admire about Peter is his commitment to Austrian economics, despite the toll taken on his career at the hands of “traditional” microeconomists who couldn’t tell a production function from a real company. Come to think of it, of course they can’t: They think they’re synonymous.

Last, but certainly not least, is Professor Tom Box of Pittsburg State University. Tom and I are Marines.4 Tom is also a former union steward and construction foreman. He got his undergraduate degree in math when he was almost 40, his MBA in operations research after that, and his Ph.D. in strategic management in his fifties. He is a great colleague, close friend, and sometime consulting and literary collaborator. Tom and I are gruff, serious men devoted to country and family. We met when Oklahoma State offered its first MBA classes in Tulsa in January 1983. We have been fast friends ever since.

And then there are the friends I am so lucky to have. First among equals is Bob Kimmel, semiretired CEO of the Elliot Companies, Roanoke, Virginia. I first met Bob in 1976 when I was a junior auditor at Union Pacific and he was director of accounting operations at its Champlin Petroleum subsidiary. Not quite eight years later he and his lovely bride, Fran, moved in next door to some good friends of mine in Tulsa. Bob and I have been thick as thieves ever since. The four of us have spent many wonderful hours together solving the world’s problems (several times, at least). Bob is also the wisest man I know. I would never play poker with him. It would be far more fun to just write him a check and forgo the humiliation.

Right alongside Bob is Alfred M. King, vice chairman of valuation firm Marshall & Stevens Inc. Al is a friend, colleague, collaborator, coauthor, sounding board, encyclopedia of institutional knowledge, and like-minded troublemaker. He and I see politics, ethics, and valuation almost identically. He is a relentlessly upbeat, high-energy man who, at an age when many guys are playing too much golf and drinking too much whiskey, continues to pursue with passion the work he loves.

I have also received encouragement from Jay B. Abrams, Dorothy Alford, Parnell Black, Vicki and James Breech, Byrlan Cass-Shively, Professor Russ Coff, Don and Maggie Cunningham, Tony Eastmond, Jim Edge, David Foster, James A. Hale Jr., Professor Emeritus John Harris, John B. Hennis, Brien Jones, Michael Kalashian, Chris Kean, Professor Michael Leiblein, Tom Lincoln, Lucretia Lyons, Professor Rich Makadok, John Markel, Professor Cathy Maritan, Michael J. Mattson, Maureen McNamee, Professor Tom Moliterno, Bill Rister, Susan M. Saidens, Margaret Schlachter, Dale Shepherd, and Dan Vance. Thanks to all of you. Any omissions are inadvertent and unintended.

My editor at John Wiley & Sons, Sheck Cho, is the best. He is a gentle man with a wonderful sense of humor who understands writers and our demons. Al King recommended Sheck to me early. Without him, a wonderful mix of carrot and stick, the book would be yet unfinished.

My go-to software guy, Russell Hudson of StrategeMetrix, LLC, is a talented and hardworking professional whom I met at the annual Strategic Management Society conference in San Diego in 2007. He congratulated me after a session in which I had asked some especially difficult questions. We talked for a while and agreed to follow up by phone after the conference. During one of those conversations, I suggested to Russ that he consider enrolling in the curriculum leading to the Chartered Financial Analyst designation. With his DBA in strategic management, I thought that having the CFA charter would open a world of valuation and consulting to him. He said that he would look into it.

I got an e-mail from him 19 months later in June 2009. He wrote to say he had sat for Level 2 of the CFA exam two days before. I picked up the phone and called him. I was looking for an Excel expert with some strategy knowledge. I asked him to rank his Excel skills on a scale of 1 to 7. I’ll never forget his response: “I’m about a 5.5, but I’m surrounded by 9s.” He undersold himself. He is a first-rate colleague who will make a world-class valuation professional. He did a great job asking me tough follow-up questions that produced a terrific and easy-to-understand Excel tool to go with this book.

Last, but certainly not least, is my family. My daughter, Seana Roubinek, and my grandson, Jordan T. Roubinek, have been inspirations to me when they didn’t know it. My stepsons, Jim and Paul Beckert, give their mom the respect and affirmation she richly deserves. Paul’s wife, Janie, is a continuing source of good humor, hilarious e-mails, great photographs, and insightful commentary on life’s events.

A key member of my family is no longer with us: Grandmother Miller. She was a third-generation college graduate, Cal/Berkeley, Class of 1912. She worked until she was 99 and lived to be 106. She was upbeat, positive, and forward-looking. She is my model for aging with grace. I know that she would be delighted with the publication of her only grandson’s first book.

My bride and loving spouse, Dorothy Beckert, to whom this book is dedicated, is the source of all things good in my life. She has taught me everything I know about love, respect, and family. There is not a kinder, sweeter, dearer, more steadfast, more patient, or tougher woman on this earth, and I am the beneficiary of all of that. She knows I love her with all my heart and soul because I tell her at least a dozen times every day.

I have received insightful comments, wonderful advice, and recommended changes from many I have named here. They are far smarter than I, which is one of many ways that I benefit from knowing them. In most cases, I took their advice. In some cases, I did not. In those instances and others, no doubt, I have erred. Those mistakes are mine and mine alone.

About The Web Site

Congratulations! With your purchase of this book, you also gain access C ongratulations! With your purchase of this book, you also gain access to a special Web site: www.wiley.com/go/valuemaps. There you will find sample questions for on-site interviews (Chapter 10) and Excel templates to help you quantify non-size unsystematic risk: macroenvironment (Chapter 8), domain (Chapter 9), and company (Chapter 11). There is also another Excel sheet, which gives you a graphical representation of the archetype to which your client company is closest, based on how you responded to scaled questions related to Chapter 11. Inconsistencies in a client’s SPARC profile present opportunities for value enhancement.

In addition to these goodies, we have included graphics of the trilevel unsystematic risk framework and its three components. You are welcome to use these in your reports so long as you agree to attribute them to Beckmill Research, LLC. We include suggested wording for a footnote or end note.

Please revisit the site on occasion. From time to time, we will add materials to support your work in helping client companies enhance value.

The password for the Web site is: value

Don’t hesitate to contact us via [email protected] with ideas and suggestions for what we can do better. We also encourage you to syndicate our blog. It is on our Web site, www.beckmill.com. While you’re there, please register at www.beckmill.com/register.asp.

List of Acronyms

CAPMCapital asset pricing model; the modified version that includes elements of unsytematic risk is used here.CEOChief executive officer.CFOChief financial officer.CPACertified public accountant; similar to the CA (chartered accountant) designation used outside the United States.DCFDiscounted cash flow. Unlike net income, DCF measures changes in cash from the perspective of either the company or the shareholders. These are often labeled FCFF (free cash flow to the firm) and FCFE (free cash flow to equity).FTCFederal Trade Commission. In the United States, a federal agency charged with consumer protection and with encouraging greater competition.FTEsFull-time-equivalent employees.GMGeneral manager.GEGeneral Electric Company.HRHuman relations (a.k.a., personnel). The department or the professionals that oversee that function within a company.IOIndustrial organization. Within economics, a field that is concerned with the structure, conduct, and performance of industries and also with antitrust policy and enforcement.IRSInternal Revenue Service. In the United States, the federal agency responsible for collecting taxes and administering the Internal Revenue Code (IRC), now over 65,000 pages long.LBOLeveraged buy-out. Entity-level financing technique that favors debt over equity.NAICSNorth American Industry Classification System. Governmental numerical scheme for classifying business activities in the United States, Canada, and Mexico; in the United States, it replaces SIC codes (see entry).OTOrganization theory. Within management, an academic discipline concerned with the structure, processes, and culture of an organization and its relationship with its external environment.PDPsPersonal development programs. These are goals, usually annual, to which employees commit to increase their knowledge and skillsets. Such programs are essential in high-growth companies, or else the scope of the company will quickly outstrip the management ability of those running it. Tell-tale sign: rising revenues and falling profits.R&DResearch and development. Sometimes called R&E (research and experimentation) outside the United States.RBVResource-based view of the firm. This theory has two key assumptions: (1) the resource endowment of a company is unique, and (2) resources are nonportable.S-C-PStructure-conduct-performance paradigm that is widely used by IO scholars.SICStandard Industrial Classification. A numerical scheme devised by the United States Bureau of the Census in the 1930s to classify business activities; it is being replaced by NAICS (see entry).SKUStock-keeping unit (unique item of inventory). More SKUs mean greater complexity, which requires more investment in infrastructure and increases the likelihood of error and rework.SMESmall and medium-sized enterprises. There is no consensus on what the upper and lower limits of SMEs are, but, in this book, we use SME to describe an organization that is bigger than one-person or “mom-and-pop” business and has annual revenues below $250 million.SPARCStrategy, People, Architecture, Routines, Culture. The central analytical framework of this book; it contains the universe of company-level causes of aberrant metrics (those that are well above or well below industry or domain norms).VRIOA framework devised by Ohio State’s Jay Barney to gain insight into the durability of a capability; VRIO asks four questions: (1) Is the capability valuable? (2) Is it rare? (3) Is it inimitable? (4) Is it organizationally aligned?

PART I

CORNERSTONES

CHAPTER 1

Why a New Approach Is Needed

At the conclusion of a valuation engagement, the professional should conclusion of a valuation engagement, the professional should have value-enhancing insights into the client’s business that the client does not have. This is true even in projects in the rapidly growing niche, valuation for financial reporting. If the analyst does not have such insights, then he or she did not do the job right. That is a strong statement, I know. But I am with Dizzy Dean, the supremely self-confident pitcher from the 1930s, who liked to say “If you can do it, it ain’t braggin’.”

The valuation field is growing fast. The general absence of barriers to entry in our arena, however, invites opportunists, charlatans, incompetents, low-ballers, and rip-off artists to eviscerate pricing and destroy the opportunities that serious practitioners can have to create value for clients. At Beckmill Research, LLC, we are about value creation. That comes from my experience before I became a valuation guy. I had held various jobs as a financial professional, but the game-changer—life-changer, really—was the half-decade I spent as a Ph.D. student in strategic management in the mid-1980s. As the word ‘strategic’ suggests, it is management for the long term as seen from the top of the organization. The focus is on the creation and retention of value. We—my wife, Dorothy, and I—launched our firm in 1991 as a strategy boutique. I “discovered” valuation in 1993. As I dove into the field devouring books and everyother piece of information I could find, I was struck by the huge disparity in rates of return among firms of different size in the Ibbotson dataset. Frustrated by the insufficiency of tools from finance and accounting to explain such disparities, I began experimenting, first with tools from strategy. I found that they had considerable utility. I then added other tools from industrial organization and organization theory, two other disciplines I had encountered in my Ph.D. coursework.

At a valuation seminar sponsored by the American Society of Appraisers (ASA) in 1995, one of the instructors introduced Porter’s five-forces framework. My jaw dropped, and I almost fell out of my chair. I had the empirical confirmation that I needed that I was on the right track.

Not surprisingly, we see the world differently from most of our colleagues. For starters, we do not believe that valuation has much to do with accounting. Now, before all my accounting colleagues take aim at me, please hold your fire and allow me to explain. For starters, I am a Certified Public Accountant (CPA) and a Certified Management Accountant, as well as a former controller and chief financial officer (CFO). But, if accounting knowledge were essential in this line of work, we would see CPAs on what remains of Wall Street and working for buy-side institutions. Few are there. Labor markets are telling us something.

Don’t misunderstand. I’m glad I know, understand, and can do accounting. I’m a better valuation professional because of that knowledge and experience. But I suffer from no delusions that valuation should be seen through the lens of accounting. It shouldn’t, and here’s why: Valuation is about the future, and accounting is about the past.5 It’s that simple.

Like most who have worked in this emerging field for a while, I didn’t start out here. Near the end of cramming four years of undergraduate education into 14, I had 54 on-campus job interviews, got 53 rejection letters (including eight in one day, which surely must be a record), and received one job offer. That lifeline was to become an internal auditor at Union Pacific Corporation (UP).

Next to what I do now, that job was the most fun I ever had professionally. The staff at “Uncle Pete,” as we called it, was run in the mid-1970s by former members of the “traveling audit staff” at General Electric. My two years there were a career-changing experience that stands me in good stead to this day.

For one thing, the idea of paying our way was hammered into us. We were obsessed with finding ways to reduce costs, eliminate inefficiencies, and help processes work better in our operational audits of various functions within the far-flung UP empire. The late Charlie Billingsley, then the general auditor for UP, oversaw the staff. It was a preschooler, barely five years old when I joined it. We spent only a quarter of our time on financial audits; that was to keep the fees of the outside auditors down. The other nine months of the year, we did operational auditing, long before such audits became all the rage in U.S. industry.

We had audit programs, of course, but Charlie liked to say: “At the end of the day we have a three-word audit program around here: ‘Do something smart.”’ That is because operational audits, like business valuations, are very much about “facts and circumstances.”

As I did when I started out in 1975, today I still go where the facts and the circumstances lead me. If that makes the client happy, terrific. If it makes the client unhappy, well, I’m sorry. We want clients to be happy but their happiness is not part of our engagement letter. It doesn’t change anything we do. In the inimitable characterization by the late Senator Paul Tsongas, valuation professionals cannot be “pander bears.” Those who are—and there are many of them these days—mislead and disrespect clients. In the process, they undermine the hard work and credibility of the rest of us.

Valuation as Craft6

We often hear colleagues bantering back and forth over the question, “Is valuation an art or a science?” Some claim to know the answer. Others take an unambiguous position straddling the fence, muttering that it is some of each. We believe that, like adherents to traditional microeconomics, what they are debating is about the pinhead-dancing of angels.

Valuation is craft. It is not science because it lacks precision and certainty. It is not art because it has utility and economic dimensions. The word “craft” summons images of objects made by hand—by masons, carpenters, weavers, silversmiths, sculptors, and potters. But such one-off work products also come from surgeons, writers, dentists, basic researchers—and valuation professionals. In a craft, neophytes serve apprenticeships under the supervision of a journeyman (or journeywoman). She or he is experienced in the craft and is older, wiser, and more knowledgeable. In a craft, experience dominates because only through experience can one acquire the necessary knowledge of nuance and technique that enables the delivery of a top-flight product.

When craftspeople talk with clients, we speak as weavers, masons, silversmiths, carpenters . . . or analysts. When we speak to one another, however, we speak as craftspeople. We understand the use of every tool in our tool-box. That understanding, combined with our experience, gives dignity to our work product.

Each craftsman creates a body of work that grows, evolves, and improves with experience. Each creation is unique. Each is personal. Each is a stand-alone statement by and about the craftswoman. Improvement comes only from repeated ventures into the craft, pushing the envelope, extending knowledge, expanding reach, and explaining meaning. Craft that does not explain has not meaning and is not craft.

None of these aesthetics, sensory experiences, or nuances afflict charlatans masquerading as craftsmen. They think only of power, prestige, and money. We think only of preserving and enhancing our craft. If we do right by our craft, money and the rest of it takes care of itself.

Done right, every valuation—like every surgery, every piece of handmade furniture, every rock wall, and every silver-and-turquoise belt buckle—is different, not at the margin but in substance. There is a process, of course, and we must respect and follow it wherever it leads us, regardless of how the client feels; if she feels strongly enough, she can fire us. So be it. But, that is why “facts and circumstances” are so important in our craft. It is also why one-size-fits-all doesn’t work any better in valuation than it does in haberdashery.

The State of Our Craft

Academic scholars are craftspeople, too. Every paper, whether published or not, gives them new knowledge, new understanding, and insights that they didn’t have before. Some business professionals disparage the primacy, at least at larger institutions, of research. Before I spent five years in a doctoral program, I did, too. I learned there, though, that research keeps professors, especially the tenured ones, current in their knowledge. I have seen faculty members at colleges without a research emphasis, and what they know—and what they teach, of course—is often out of date. But 19-year-olds will never know until it’s too late.

Besides keeping professors’ knowledge current, I believe there is an even stronger argument for a research component: Those in the business of disseminating knowledge should also be about the business of creating some. Similarly, those of us in the business of assessing value should be about the business of knowing how to create it. And if we know how to create it, then opportunities present themselves to do great work helping clients increase the value of their life’s work.

The literature of business valuation today is resoundingly mute on the issue of value creation. The major reference books—by Shannon Pratt; George Hawkins and Michael Paschall; Chris Mercer; McKinsey’s Tim Koller and his colleagues; and by those who contributed chapters to Jim Hitchner’s edited volume7—all come from serious professionals with financial backgrounds. Such backgrounds can be limiting; I know because I started out that way. In none of these books, for instance, is there any discussion about value-creating mechanisms, their durability, and the ability of current or would-be competitors to replicate or imitate them. There is nothing about how to analyze and assess such mechanisms. Most important, they are silent on the issue of how to create value.

I’m reminded of the famous words of Supreme Court Justice Potter Stewart in a 1964 pornography case:

I shall not today attempt further to define the kinds of material I understand to be embraced within that shorthand description [of pornography]; and perhaps I could never succeed in intelligibly doing so. But I know it when I see it.8

Business valuation is more than numbers. It is about cause-and-effect relationships and how or if a firm creates value. We need an approach to valuation and a framework that enables us to identify causal relationships and that takes us to how value is created, how to assess the durability of value-creating mechanisms, and how to make replication and imitation by competitors more difficult and impossible if possible. This book advances such an approach and such a framework.

Cause and Effect: What and Why

The data archives and ratio analysis tell us what. The published research tells us where. But neither tells us why. The view taken here is that why matters. In our experience, it is all too common in a valuation report to read a paragraph like this:

The Company’s inventory turnover, which is Cost of Goods Sold divided by average inventory, is ½ the industry average. That means that the Company is not selling what it has on hand as fast as the rest of the industry is. Days’ sales outstanding is. . . .

We have only one question: Why is inventory turn half the industry average? The expanding literature of valuation teems with “tools of the what,” especially ratio analysis. Unfortunately, it offers few tools that help us get at “the why.” Yet if a valuation professional cannot explain why a certain metric is notably above or notably below where competitors’ performance is, then the probability is overwhelming that the analyst does not understand the business that she or he purports to value. And without that understanding, the valuation will be on point only by chance.

To be sure, a blind hog can find an acorn every now and then. But it is not something I’d want to bet the farm on every day of the week.

Explaining why not only enhances the quality of the analysis, it also increases the credibility of the analyst. Put yourself in the role of a judge and ask yourself who you would think is more credible: a professional who can explain why or one who cannot. It never ceases to amaze us that so few valuation reports really explain the why. They don’t explain why because their authors don’t know why, yet understanding why is the key to sound valuation practice as well as to unlocking business wealth.

Multidisciplinary Tools for Analyzing Value Creation

Many of our valuation colleagues—hardworking, honest, well-intended people, all—have one “deep” specialty. It might be accounting or finance. Or it could be expertise in a domain—for example, healthcare. We believe that valuation, especially of closely held companies for whose securities there are no active markets, is difficult and complicated. It is also multifaceted. Therefore, we cannot get by with knowing a little about a lot or a lot about a little. To serve clients and do right by our profession, we must know a lot . . . about a lot.

As a craft, our work is multifaceted. The absence of active securities markets requires us to be able to look at a situation from different angles, with different perspectives, and through different lenses. In our shop, we have an arsenal of tools that we use in almost every valuation. These tools—mental, but no less cutting edge than a surgeon’s scalpel—come from a panoply of disciplines that we have learned to use over the years.

First and foremost is strategic management. Before “discovering” business valuation in 1993, I spent a half-decade as a Ph.D. student in strategy. Almost from the beginning of my valuation journey, I saw overlap in the basic questions underpinning these two fields:

• Strategy. Why do some companies perform much better than others for long periods of time?

• Valuation. Why is this company worth what I say it is worth?

It is all about why. I knew that finance and accounting knowledge was not going to be enough. I also saw that some key ideas from strategic management could be deployed in valuation. Strategy-based notions such as distinctive advantage, strategic intent, and generic competitive strategies had roles to play in business valuation. We elaborate at length on these in Chapter 2.

The second field on which we rely for understanding and explaining value creation is a branch of economics, industrial organization (IO). IO itself has two subfields: antitrust and industry studies. We focus on the tools of industry studies. In IO, the unit of analysis (i.e., what the analyst examines) is not the individual company. It is the domain: the group of firms in the valuation entity’s competitive arena. The 1974 Ph.D. of strategy guru Michael Porter was in IO. It was thus no accident that he rose to prominence through his “five-forces framework” (which we have expanded to six).9 Chapter 3 is about IO’s applications to valuation.

The third field from which we draw our perspective about creating value is organization theory (OT). OT deals with the multidimensional relationship between organizational structure and company performance. It also considers external influences (macroenvironment and domain) on the available choices for structuring and designing an organization. Phrases such as “span of control,” “boundary scanning,” and “policies and procedures” are prominent in the OT lexicon. Prominent OT scholars include Barney and Ouchi, Daft, and Galbraith.10 We devote Chapter 4 to a discussion of the use of OT tools in business valuation.

The fourth piece of our multidisciplinary puzzle is evolutionary economics. The connection between evolution and economics originated with UCLA’s Armen Alchian.11 Building on Alchian and on the behavioral theory of firms,12 An Evolutionary Theory of Economic Change brought evolutionary economics to the fore.13 The gist of this book is the importance of “routines” in determining firms’ behaviors and decision making, the economic analog of genes embedded in firms’ behaviors, the effects of technological innovation on economic growth, and the selection processes by which firms grow and survive . . . or don’t grow and don’t survive.

Somewhat parallel to the work of Alchian was Edith Penrose’s seminal contribution, A Theory of the Growth of the Firm.14 Penrose was the first to identify the constraints imposed by managerial knowledge and a firm’s resources on its ability to grow. Her work laid the foundation for what became, 25 years later, the resource-based view of the firm (RBV).15

The RBV posits that firms have unique resource endowments, which are due in no small part to the uniqueness of the people working inside companies, and that those resource endowments ultimately become embedded in routines and thus are nonportable from one firm to another. In part, this explains why imitation can never explain superior performance. It also explains why firms that try to purloin the capabilities of competitors by hiring their key people invariably come up short. The only way to appropriate those capabilities is to buy the entire rival. Even then, it probably won’t work, however, because most acquirers cannot leave well enough alone and insist on meddling and changing the prize they bought. That is a major reason why over three-quarters of acquisitions fail to earn back their cost of capital: Firms overpay and then cannot deliver. Evolutionary economics is the subject of Chapter 5.

Given my criticism of traditional microeconomics, readers will not be surprised that I have a different perspective: Austrian economics. It has two central tenets: (1) value is subjective and (2) human action is purposeful. But for Hitler’s rampage against Jews, it is likely that the legislatures and central banks of the free world would have seen economics from an Austrian perspective for the last 70 years. The key debate in economics in the 1930s was, after all, between John Maynard Keynes and Friedrich von Hayek. But Jewish economists, including Hayek, Ludwig von Mises, Ludwig Lachmann, and Fritz Machlup, had to flee Vienna to elude the coming Nazi murder machine. The resulting geographic dispersion of these scholars snuffed out the synergy of intellectual firepower that occurs when brilliant people gather daily to argue, theorize, criticize, and innovate. We elaborate on these and other aspects of the Austrian School in Chapter 6.

Our focus on these five disciplines does not mean that they are the only ones that matter. Certainly an in-depth knowledge of finance—the capital asset pricing model (CAPM) and hedging—is essential. A good grasp of marketing, anthropology, and operations management is likewise helpful. Each has its own vernacular, which valuation professionals should be able to speak. But we zero in on these five other fields because they comprise the cornerstones of the new approach to valuation that is the subject of this chapter and of this book.

Parameters of Valuation

This equation means that as expected growth or free cash flow increases, value should also increase. However, value varies inversely with risk (i.e., as risk increases, value decreases). We see it every day in bond markets: Interest rates [risk] rise (fall), bond prices [value] fall (rise). We know from statistics that there are outliers in any large distribution, but the exceptions serve to prove the rule.

In our experience working for and with owners of smaller businesses for the last 30 years, we have yet to meet one who has been advised to increase the value of his business by reducing its risk. They have all heard that they should grow the business, though growth seems to focus on the top line only. They have all heard that, to increase the value of their business, they should “increase profit.” However, few of them have understood why there is a substantial difference between “net income” and “free cash flow” in growing businesses. In fact, many owners judge the health of their business by how much cash they have in the bank.

Rapid growth is risky. It has impoverished—and sometimes bankrupted—many more businesses than it has ever enriched. We subscribe to the adage, “If you’re going to grow the business, you’d better grow the people and the infrastructure first.” Otherwise, a $20 million business ends up perched on a $2 million infrastructure while it’s run by people with $2 million skill sets. The data from Morningstar and Duff & Phelps persuade us that reducing risk is a gigantic slice of the valuation pie for most owners and chief executive officers (CEOs) of nonpublic businesses.

What We Know about Risk

From the data sets of Morningstar and Duff & Phelps, we know that, on balance, smaller companies are far riskier than larger ones. What those data do not tell us, however, is why. Are smaller enterprises riskier because they’re smaller, or smaller because they’re riskier? We subscribe to the former because most firms become less risky as they grow larger.

What those data sets do not tell us, however, is where the risk of smaller companies comes from. For that, we turn to the literature of strategic management. From 1991 through 2007, nine papers published in top-tier “A” journals found that, on average, variation in rate of return was 2.9 times as great at the company level as it was at the domain (i.e., industry) level. Let’s think through the implications of those findings for valuation professionals.

• Companies within a domain are more different than domains themselves. That notion of “competitive heterogeneity” flies in the face of traditional microeconomic models, which ignore innovation, exclude the effects of entrepreneurship, disregard differentiation, are silent about causality, assert that the actions of no competitor affect the actions or profitability of any other, and assume that a domain’s output is a commodity where the only question is price. Such assumptions make for elegant mathematics, but little else.

• Domain definition is essential because it provides the constraints that enable the facts and circumstances of a given valuation situation to be analyzed in context.

• The research findings also suggest that the variation which has enabled humans to evolve and survive for millions of years is found in economics, too. Imitation is not the way to fame and fortune. Superior performance comes from doing differently.

• Competitors have different beliefs about what is important, different views about how things work, different resources, and different ways of doing things (called “routines”) that lead to different levels of performance.

• These differences highlight disparities in the value of assets because of disparities in how companies deploy them and the rates of return the assets would bring. The farther one goes down the balance sheet, the more disparate these views become.

Components of Risk

From the capital asset pricing model, we know that risk comes in two flavors: systematic and unsystematic. Systematic risk is “market risk,” also known as undiversifiable risk. Using modern portfolio theory, finance scholars assume away the problem of unsystematic risk by positing that rational investors hold fully diversified portfolios. That is sound investment counsel, of course, but it is a nonstarter for most owners of closely held businesses. To paraphrase the late football coach Vince Lombardi, for them, “Unsystematic risk isn’t everything. It’s the only thing.” But exactly what do we mean by unsystematic risk?

As we have previously noted, longitudinal data from Morningstar and from Duff & Phelps confirm that size (however measured) and rate of return are negatively correlated. However, both data sets take us only as far as the size premium. Therefore, let’s list the components of nonsize unsystematic risk:

• Macroenvironment. Six forces.

• Competitive domain (industry or strategic group). Six forces.

• Company. Firm-level risk is a function of alignment and of the durability of value-creating mechanisms.

Solid data are available for the first three terms but not for the rest. It is these latter factors that complicate the analysis and valuation of smaller companies. That is why an analytical framework is so important. Done right, the process endows us with insights and a comprehensive understanding of the business(es) of the subject company. One cannot understand a smaller firm’s business—really understand it—without an in-depth grasp of its unsystematic risk.

A Framework for Unsystematic Risk

Small and medium-sized enterprises (SMEs) are the sweet spot in the market for valuation services. Finance scholars assume away unsystematic risk, yet these are the companies that have most of it. There are few data for non-size components—macroenvironment, domain, and company. Morningstar /Ibbotson publishes industry risk premiums, but these are of little use to most professionals, as we shall see in Chapter 9. Before we can gather data, create hypotheses, and test them, however, we need a framework to guide us toward that data. We wrestled with the problem for a dozen years, beginning with Porter’s value chain (see Exhibit 1.1).16

Exhibit 1.1Value Chain

SME clients found it convoluted, unintuitive, and hard to use. We next tried McKinsey’s “7-S Framework” (see Exhibit 1.2).17

This had the appeal of being alliterative, which McKinsey did intentionally to make for ease of recall. But it ignored such organizational facets as culture. And all the interacting variables, as represented by the lines in 7-S lines, made it visibly “busy,” both for SME clients and for us.

Exhibit 1.2 McKinsey’s 7-S Framework

Exhibit 1.3Star Model

We next tried something from Jay Galbraith. His field is OT, and that is evident in his model (see Exhibit 1.3).18

Truth be told, we liked the star model. But we believed that culture should be an integral part of any model, not an afterthought, as the exhibit seems to suggest. We also had the problem with all three models—Porter’s, McKinsey’s, and Galbraith’s—of how to make it work inside a graphic representation of the other two nonsize components of unsystematic risk, macroenvironment, and domain.

Borrowing from strategic management, industrial organization, OT, evolutionary economics, and Austrian economics, we created a trilevel unsystematic risk framework (see Exhibit 1.4).

The framework resonated with clients when we first used it in 2005. For valuation professionals, it is easy to remember (two hexagons + SPARC) and easy to work with. In our shop, we also use it as a kind of mental filing cabinet as we gather information, do research, conduct interviews, and work through the analysis and performance metrics in valuing a client company.

Exhibit 1.4Trilevel Unsystematic Risk Framework

Most important from our standpoint, we now have a framework that enables valuation professionals to explain why. At the company level, there are five components. SPARC has been back-tested in more than 400 valuations and advisory engagements over the last 17 years. In every case, its elements—strategy, people, architecture, routines, culture—explained, sometimes in combination with one another, the aberrant metrics at the company level.

Unlocking Business Wealth

Using the framework and tools in this book, valuation professionals will have opportunities for add-on consulting work. In our shop, for instance, we often combine “calculations engagements” with a value-enhancement phase. Most often this combination occurs in the initial stages of exit planning, buy-ins by one or more new internal owners, or an overarching desire by an owner or chief executive to enhance business value. No valuation report is necessary at that point. Besides getting a range of value of the business, the client also gets a “value map” that points the way to increasing the value of the business as it goes through the fix-up stage prior to being put on the market or sold to known buyers.

SPARC is the linchpin of the add-on deliverable. Understanding the why is the essence of SPARC. And once we have our arms around the why, we can, with additional research and an in-depth understanding of the routines and capabilities of the client company, make detailed recommendations under the SPARC aegis to reduce risk, boost cash flow, and increase the expected rate of growth in free cash flow. This process adds real value for clients.

To be sure, it does not happen overnight. Lead time of 18 to 36 months provides the kind of window necessary to do the work to get the value up, identify and contact potential buyers, and conduct the auction that fetches top dollar for the seller. It is a natural extension of the work the valuation professional has already done for her to be the outside quarterback in the value-enhancement phase. Besides leading to a far bigger payday for the client, the work—which can be done on a contingency basis, but with a hefty retainer—is lucrative for the professional. Routing it through a separate entity where one does not run afoul of provisions that restrict or prohibit contingency pricing, especially for CPAs, can be useful, as can teaming up with a boutique investment banking firm. In contingency-fee engagements, however, one must be careful to avoid holding oneself out as, for instance, a CPA or as having any other credential whose sponsoring organization takes a dim view of “success fees.”

Summary