The Dark Art of Business Valuation I call it the dark art of business valuation because there are a lot of charlatans in that world. Business valuation is very interesting and yet massively misunderstood. There are businesses that make money valuing businesses, which I find incredible because the real definition of what a business is …
How are the acquisitions paid for?
Most roll ups are either debt-funded or investor-funded. Either route creates a huge stress on the eventual vehicle, either pushed by investors for results or so burdened with debt they fall over (the leveraged buyout or LBO). You can do a straight equity merger, but you have to have a compelling plan. A possible trade/sale at some point in the future won’t generally cut it.
Synergies & Centralization
People think the reason to roll up is to get synergies and to centralize. While that is one future benefit that may manifest itself, I have gone full circle on this (born out of my own hard-won experience), and now believe that, post-merger, less is more. You can spend a fortune and upset everyone—staff and customers included—by trying to squeeze every last dollar out in your first 100 days (or whatever plan you are using), Don’t forget you actually create a huge amount of value straight away by creating the scale, so be happy with that and focus on allowing the business to just keep doing what it has always done. Stagnation post-merger should be viewed as a raging success! The challenge I always had then is how to motivate synergies later, and the Unity Agglomeration™ solves that.
Management
The problem with management is that it doesn’t work! In fact, most management books I have read in the last 15 years are all about how the modern hierarchical management structures just don’t fit with the current generation of talent. People now want mastery over what they do, empowerment to do it their way. And let’s face it, if they have built a successful business in that space, why would you want to tell them to do something different. People are too obsessed with control over results. Often, results come from giving control, not taking it.
Brand Retention
So many companies are obsessed with acquiring businesses and changing the name above the door; they want to show off their new acquisition. But with all the years of work and trouble that have been invested, the brand is actually a valuable asset that should be retained. And, as I have already mentioned, people hate change, so customers and staff alike can rebel at this point.
Talent Retention
When companies sell or merge, often the first thing that happens is the key people leave, sometimes with the key customers. In SMEs, talent is everything; it is often their only unique selling proposition (USP).
Ego/Pride
People don’t want to feel like they sold out, got bought, or gave up. They want to see their efforts rewarded with growth and success in their own name.
Access To Capital
We all know we should not keep all of our eggs in one basket, but entrepreneurs feel forced to. They have their shares in their business and that is it, for better or worse, and often this business will be taking the best years of their life. I think we are taught to see that it is all or nothing, that you either ‘hit it out of the park’ or you fail and there is no happy medium.
Portfolio Approach
We all know we should not keep all of our eggs in one basket, but entrepreneurs feel forced to. They have their shares in their business and that is it, for better or worse, and often this business will be taking the best years of their life. I think we are taught to see that it is all or nothing, that you either ‘hit it out of the park’ or you fail and there is no happy medium.
Global Expansion
Wealth & Value Creation
As a business owner, how do you create the best value and wealth from your business? Do you sell? Do you leave it under management? A lot of people, myself included, had good businesses that were “keepers” back in 2007-2008 that simply don’t exist anymore.
The biggest issue with wealth creation in business is that only 20% of businesses actually create any wealth for their owners (the rest cease to be), and of those, they don’t normally achieve much more than a return on capital (sweat equity in most cases). In a free market, businesses find an equilibrium where profit basically boils back to a risk-weighted return on capital.
And the very free market that allows you to start up so easily also makes it very difficult to break out from the momentum of mediocrity.
Liquidity
The ability to buy and sell your shares. This might seem a little strange at first, and not one you might have thought was a challenge, but it is a huge driver of shareholder value. Publicly-listed shares often carry a premium for their liquidity, and for most entrepreneurs, the exit is a “binary” choice: they sell or they don’t sell. If they take on an investor, they have to show a strong business case for the use of the money. They can’t just go and buy a Porsche.
Demographics
How is this a problem? Mature economies, such as in the US, Canada, UK/Europe, Japan, Singapore, and Australia, are facing what’s called the “demographic cliff.” In these countries, the baby boomer generation started businesses, and these are often solid profitable and successful. But unlike previous generations, where there was always a wave of new blood to come and acquire or take over running these businesses, for the first time in history, the next generation is smaller than the last. This means that literally millions of small- to medium-sized businesses are going to find themselves without succession and without buyers, too small for the larger players to buy, and too good to simply close down.
Succession
Entrepreneurs are often integral to the business, and when it comes to an exit, they often get tied up in legal knots to retain them. This often means they can’t get their hands on the exit money for years, or it creates a huge risk by paying them off so they leave and most of the drive and passion leaves with them. People hate change. So how do you safely transition in future?
The Scale Paradox
This is well-known to most entrepreneurs: you have to be big to get big. Landing the biggest-margin, juiciest contracts often requires you to be big enough to handle them, so while you might have the expertise that no one else does, you often find the dominant market player picks up the contract and subcontracts to the specialist to actually get it done. Scale not only affects growth, but also valuation. Big businesses are just worth more than small businesses.