We'll Learn from the 2016 Presidential Elections

Let's start with Millennials.  They know we have been embroiled in Middle East conflicts since 1990, (if national interests since before World War I are excluded).  No Millennials were directly exposed to a military draft, so few know the sacrifice of our families of those who volunteered and endured multiple deployments.

Millennials learned Boomers consume what wouldn't necessarily be called food.  They prefer organic and having bottled water as they knew the hazards of not being a steward of our environment. 

Yet, "clean energy" is often seen as code for limiting fossil fuel and coal production.  This often aligns with the loss of higher paying blue collar jobs as manufacturing also suffered from our global economy.  Clothing, electronics and furniture were produced overseas and returned in the form of cheaper goods benefitting those shopping at Walmart: The Peoples' Store.

Millennials know higher education costs have sky-rocketed while seeking opportunities allowing them to express individualism, not wanting "knowledge," not construction jobs their parents had. 

Unenviably Boomers are wedged between their adult children and their parents.  Some allowed their children to explore and find connection using tablets and phones, so the notion of "family" and "friends" is based upon "likes" not feelings.  Selfies andentertainment-based reality is often preferred to real activities. 

Fewer children, declining marriages and physical and emotional distance make healthy extended family maintenance more challenging which is compounded by infirmed parental care. 

Our social contract seems confused.  Few minded the trillions spent on military operations overseas while investment in our own citizens and national infrastructure continued to decline. 

Many were so intoxicated by first home and McMansion ownership with ready capital to spend on discretionary items and debt-laden investments until the credit merry-go-round skidded to a halt.  A large number of individuals lost their jobs and homes making any general economic recovery nothing close to the "borrowed" middle-class lifestyles until 2007 recession arrived.

Older boomers who may have benefitted from a decent retirement package sometimes express: "I got mine, you get yours" assuming the rules of the game have remained the same.  They, too, felt the pain of retirement accounts losing value through little fault of their own with safer investments still yielding a fraction of a percent. 

Let's put a finer point on the issue.  Many Boomers are confronted with the reality of being age 50- to 70-somethings with too little too late in their savings.  Some undoubtedly made poor choices in companions or careers.  They're confronted with the stark choices meanwhile about 20% are reasonably comfortable and gaining more due to steady work and wealth earnings. Because most want to be affluent, they often look to blame others seen as "inferior".

The history of the down-trodden is not limited to the United States or the 21st Century.  Hard work and climbing the economic ladder when most perceived there were rungs to a better life was the "square deal" most assumed was a basic right. 

Candidly, this is not so much a Democrat versus a Republican thing, but "I will not be ignored" thing.  Sadly, when confronted with little choices and less time, desperate folks take desperate measures.  It's the difference between evolution and revolution. 

Very few will look inward or stand before the mirror and think they had anything to do with their current plight.  Fewer still are heard when making "shared sacrifice" pleas for the common good, as they often know neither their trials nor tribulations.  This is why politicians and leadership are often mistrusted. 

Preservation of their positions makes leading by example hard at best.  So, a minority or a female leader creates disillusionment for some of somehow being lesser of a man.  This is why faith, family, flag and firearms can mean so much to so many.   

Find somebody who can harness the contrasts between "they" and "we" and they're provided a voice and a target. This provides power even when the promise and purpose seems suspect. 

Whether arriving at this tipping point is through desire or indifference, we shall see.  The remaining question, which also confronted our own founding fathers choosing a Republic versus a Monarchy for our fledgling nation as it is now 240 years hence will be: "Will absolute power build a bridge or a wall?"  

Posted on November 10, 2016 .

Sometimes it sucks to be right - IRS wins, business owners lose.

Late last year and the beginning of this year, I cautioned if there wasn’t improved quality control of business appraisals for gift and estate tax purposes, the U.S. Treasury would do what they did decades ago when Family Limited Partnerships were abused by enacting IRC Chapter 14.  They’d codify changes that ignore market realities that value is impacted by family owned assets and businesses.  Simply put, the investor concessions (‘discounts’) would be reduced or all-together disallowed.  So, driving down a $15 million net worth family to $10.9 million based upon the impairments associated with a family member holding an illiquid equity stake means taxes on the $4.1 million, which could mean and extra $1 million-plus.  And it goes up from there.  The hardest hit will be families with wealth of $20 million and above.

It’s 2012/2013 all over again.  There was concern that the lifetime exclusion would roll back to pre-Bush levels of $1 million.  Instead, this year with portability, a family can exclude $10.9 million from taxes.  That stills leaves 100,000+ individuals with businesses and real property worth north of the lifetime exclusion.  So, while the bonus of the 11-fold increase in tax savings occurs on the one hand to expect that discounts (especially those that are poorly supported) wouldn’t be curtailed is foolish at best.  Read the Wall Street Journal article here.

So, once again, we’ll have a crazy rush of gifting done before the proposed changes go into effect (and the outsized audits that follow for larger estates and poorly crafted appraisal reports).  Finally, it’s an election year and some proposals would return to the $3.5 million estate tax exclusion level of 2009 coupled with a $1 million gift with a 45% tax rate.  Add the possibility of the reduction or elimination of the above discounts and this means more advanced estate planning with consideration of liquidity, life-insurance and philanthropic options like at no other time during my 25-years focusing on tax, transfer, transition and trouble issues.

Because the 12 Things to Know When Selecting A Business Appraiser we shared last week was so well received, it is provided below.  Next email we’ll provide a link to the IRS’ manual for challenging discounts.

12 Things You Should Know Before Retaining An Appraiser

1.     Is business appraisal the practitioner’s full-time profession?  (Many are CPAs and Investment Bankers performing 5 or fewer reports per annum).

2.     How many business appraisals has the practitioner performed and years performing this work? (Should exceed 20 per annum and 5+ years of practice.)

3.     How many annual hours of continuing business appraisal education does the practitioner have? (Even better, how often does appraiser present and write on topic.)

4.     Is the appraiser willing to provide a sample report so client can make an informed decision?  (Would you buy a car, house or business without verification?)

5.     How many times has the appraiser defended his appraisal?  (Nothing sharpens work product than having it challenged and found well-supported.)

6.     What is the appraiser’s annual investment in data?  (In order to have mastery of industry and market, the investment commonly exceeds $40,000 per annum)

7.     Will the appraiser provide a not to exceed fee quote and a guaranteed completion date?  (Also, what is appraiser’s guarantee in defending the opined value.)

8.     The hourly rate is not the best measure of quality of product.  (If it takes 20 hours at $600 an hour or 40 hours at $400 an hour, which is “better”?)

9.     How much time and resources allocated to identifying and measuring risk?  (Most reports provide a paragraph; yet, pages are needed as risk is central to value.)

10.   How much time and intellectual rigor in measuring the impairments (“discounts” or investor concessions) associated with a non-controlling interest and illiquidity?

11.   Does the appraiser provide advisory services beyond appraisal work product?  (Company value is about managing risk, not simply revenue and profit growth.)

12.   What is the appraiser’s ability to capture and articulate intangible asset values?  (If appraiser cannot test assumptions with sanity check, value is suspect.)

Click here to read Carl's 2013 peer reviewed article, Raising the Bar.

Posted on August 4, 2016 .

Why scaling company size is so challenging...

What are you doing next Tuesday on July 12, 2016 at 1:00PM PST/4:00 PM EST?  If I had all the answers to the above question, I'd be too busy counting money.  Instead, we're hosting various growth perspectives on webinars.   If you'd like to register for this interactive discussion click here.

If you read the complementary first few chapters of my Wiley Finance book Equity Value Enhancement ("EVE"), you'll see I list several dozen trusted advisors who ought to be considered in helping a business owner get from "here" to "there".  I also indicate what each does and how they perceive risk through their professional lens.  Not surprisingly, these "constituents" are often not considered sufficiently in advance to make the real impact they could.

As an example, if the founder knew s/he needed to have a $50 million business and was half-way there with 20 years at the helm, would it be realistic s/he can expect to get there in 12 to 36 months?  Has s/he considered an investment banker with industry, private equity and/or family office contacts who might consider acquiring a minority interest? 

This achieves several things: 

> It provides more capital to accelerate growth and allows the founder to pocket some liquidity while having a possible candidate to acquire the balance.

> It allows for a fresh set of eyes for existing and future challenges and opportunities the equity investor may have a deeper rolodex of relationships and knowledge than the founder.

> It may provide a degree of professional management to navigate scaling the business both organically and through acquisition.

This is one of the reasons it's good to know folks with a background in the private capital markets.  They may assist existing legal and tax advisors in prepping and positioning the company for the highest possible price and net proceeds.  

And, if the banker does not know somebody who is a family business advisor, outreach in this realm is often a must.  Why?  About 50% of transactions go south before or near the 11th hour.   This is after hundreds of hours of professional time and thousands of dollars in advice.  Why?  The emotional issues of the founder, family and firm may have been overlooked as most advisors are looking at their blocking and tackling roles.  It's simply not just a transaction, it's a transition and wealth management is wholly different from successfully operating a company and the validation it provides.

So, why, as a Strategic Value Architect, do I believe the "growth" message gets diluted?  First, it's a "future" thing.  The daily noise of driving higher sales and profits defers the strategy execution and advisor alignment to ensure the level of resources exist to fill the "gaps" that drive value.  Keep in mind that a healthy benchmark will indicate where the company is right now and "why".  As the why is addressed, the risks are reduced.  The reduction of risks translates into higher price multiples.  The higher the price multiples, the greater the company value.  Simply growing sales and profits alone is not enough.

Accelerated growth is like losing weight.  Most look to shed all the pounds, but it's not the last pound that is the problem, it's the process of losing the first, the second, the third and so on.  We love gratification, so we convince ourselves, the "no pain, no gain" is a myth and some out-of-the-box, deeply-discounted, software-driven report will provide the answer we wish to hear. 

Imagine seeing your doctor for an annual physical and entering all the "issues" you may feel need examination into a computer.  The physician doesn't test you; s/he just generates a report based upon your inputs and what other patients have indicated are the symptoms and results. S/he prescribes some fixes and leaves you to seek these remedies. 

Unless your trusted advisor has significant midmarket expertise in scaling a business from an operational, financial and human capital perspective, then as a minimum you'll need somebody that has been doing this kind of work for a decade-plus or a steward who can manage a team to address all the multiple facets and perspectives of those tasked with getting the business to the next level whether for liquidity, leverage or legacy. 

Posted on July 5, 2016 .

RISK: Whose lens? Why it matters.

For Valuators:  We're retained to identify and measure risk and economic benefit.  In many cases, woefully inadequate documentation is provided to support company specific risk.  Yet, to determine an accurate value, we must provide more intellectual rigor and due diligence.  Examine most reports and you'll find financial assessment, but almost nothing concerning the influence of human capital.  And if equity value for a non-controlling interest is needed are the impairments ubiquitously referred to as "discounts" tied into the levels of risk (return = growth and income)?  The real opportunity in our profession is mastery of operational risks where we work with advisors and owners to manage and occasionally mitigate risks.  Thus, lowering the risk, increases company value.

For Owners:  If the smartest person in the room is not you, you're likely on your way to having a $10 million, $100 million or greater company.  You recognize you must leverage the relationships and knowledge that others offer.  This includes your advisors, clients, staff, family, board, association and suppliers.  A big hurdle is opting for the familiar faces due to the challenge of trusting others with the "beast" you birthed or gifted or acquired by you.  Somewhere, the skills of professional management will be needed to handle the dual roles of daily blocking and tackling versus ensuring long-term, value growth is achieved.  It is common to require a governance perspective to codify philosophies, principles and policies that make the company and family distinctly unique.  This is even more apparent when the family and business are intertwined while transitions are planned or disruptive to ensure significance is borne from success. 

For Attorneys:  What is the impact of dated agreements and bylaws or those legal document provisions that may not have been drafted or adhered to?  What is the influence of meeting minutes that are not prepared or no indication of key management decisions?  If an owner is not having an annual review of the company's risks with an attorney as the steward of same, it stands to reason the value of the company will be lower.  What owner wouldn't pay 50 to 1 return on investment?  Owners certainly do when insurance is purchased even when no claim is made.  Why would this differ for a general practitioner of law, trust & estate or transaction attorney?  Consider the alternative?  Would you rather pay an attorney much more due to an agreement dispute or a taxing authority audit?

For Accountants:  A seasoned CPA can do much more than save taxes.  In fact, if you're receiving large refunds you're giving Uncle Sam interest free money that ought to be working for you.  If the business owner has real estate, s/he may be able to accelerate depreciation through cost segregation, which lowers taxes.  If the CPA has a background as a CFO or is a Certified Management Accountant or offers business advisory services, s/he can also examine whether a company is highly or marginally profitableand why.  S/he may make recommendations on what is optimal amounts of accounts receivable, inventory, cash and debt to equity balance.  S/he may be able to determine whether sales and marketing expenses are having the desired impact and if labor, repairs and maintenance expenses are consistent with industry norms.  A business doesn't operate in a vacuum, so comparison against itself is an inadequate measure of risk.  Ask your CPA to "make", not report the news.

For Insurers:  Who better than insurance professionals to examine the health and vulnerability of both tangible and intangible assets ranging from cyber-threats to business interruption to a company vehicle involved in an accident to the disability or the death of a key officer and shareholder?  The presence of the right level and type of coverage at the most competitive fees that provides liquidity and options can move the value of a company by 50% or more. 

The list of trusted advisors are many.  I cover these different professionals in Equity Value Enhancement ("EVE").  RISK is the second "R" in the acronym of "GRRK" which stands for Governance, Relationships, Risks and Knowledge and represents how human capital and risk management must be considered in tandem with financial capital to pursue opportunity and differentiate a company and its offerings.  Done at the right time with professionals selected in the right way while working in alignment and applying the right framework and roadmap can increase company value by 100% or more in as few as six to 24 months.

For post readers who'd like to try "EVE" before they buy, they can request the first few book chapters here

Posted on June 16, 2016 .

Afraid of Vulnerability or Dependent on Validation?

Entrepreneurs fear the biggest risk is the one not taken.   Ours is often the avoidance of a bad selection, the opposite of which is validation for making a good one.  Opportunists see the glass half full.  Worriers see the glass half empty.  Realists think the glass could be half the size. 

Most professions offer products or services to minimize risks or enhance opportunities.  A valuation report reflects these risks and opportunities as they are.  But at what level(s)?

Interestingly, to solve for the “value” of a business, there are two parts that need to be determined. 

(1)  What is the economic benefit?  (Growth and income/cash flow); and

(2) What is the likelihood (risk) the economic benefit will occur or continue? 

While “risk” is the harder factor to identify and measure, +90% of most business valuation reports focus on the economic benefit.  Why?  Because valuations can often be formulaic instead of relying on deep due diligence and analysis.  Yet, courts and regulatory bodies expect a scientific approach (empiricism).   For the BV profession, this means mastery of finance as well as legal and operational issues. 

What’s the benefit to entrepreneurs?  The lower the risks for a company, the higher the price multiple.  The higher the price multiple, the higher the value.  If a company has $1 million in profits and higher risks, the price multiple might be 3x for a value of $3 million.   However, if the risks are lowered, the price multiple might be 5x for a value of $5 million – a $2 million difference.  If purchasing risk reduction services and/or products cost $200,000 to achieve the extra $2 million would the 10 to 1 investment be worthwhile?  The benefit to trusted advisors to solve for these risks should be evident.

If you’d like to discuss how to identify risk and influence equity value (up or down), please arrange an appointment by clicking here.  The Wiley Finance book Equity Value Enhancement (“EVE”) addresses Governance, Relationships, Risks and Knowledge (“GRRK”).  Over 100 of the 368 pages discusses these risks in detail.  Complimentary Chapter 3 providessummary of 29 risks found in 3,000+ engagements with an incidence of 80% or greater.   

Top 29 Operational Risks Found in 3,000+ Business Valuation Engagements (Frequency 80% or more often):  

  1. Meeting minutes are boilerplate (90%).
  2. No budget or forecasts (80%).
  3. No performance metrics/nominal knowledge of market/competitors (80%).
  4. No annual review of insurance (90%).
  5. No independent and regular independent and qualified valuation (95%).
  6. No business, marketing, or succession plans (90%).
  7. No strategy (90%).
  8. Nominal effort to cull clients (80%).
  9. No gain-sharing for innovation (90%).
  10. Culture is control oriented, siloed, and tactical (80%).
  11. Banking relationship is solely transactional (80%).
  12. Board comprised of family, inside directors, and friends (95%).
  13. Limited or no involvement in own or client industry associations (80%).
  14. Poor knowledge of balance sheet, P&L, or growth norms for industry (90%).
  15. No shareholder/key person/buy–sell agreements or not followed (80%).
  16. No risk assessments/SWOT analysis (80%).
  17. No review of education, experience, age, and health of key personnel (80%).
  18. Concentration of clients and vendors (80%).
  19. Little to no leverage of trusted advisors (90%).
  20. No independent advisory board (95%).
  21. Little leverage of human capital (knowledge and relationships) (90%).
  22. No effort to identify, protect, and/or leverage intangible assets (80%).
  23. Founder, management or advisors have reached capability (80%).
  24. No review to optimize capital structure (90%).
  25. No supply chain analysis (90%).
  26. Nominal cross-training of personnel (80%).
  27. Nominal redundancy of key functions (80%).
  28. Little or no training budget (80%).
  29. Underfunded or unfunded buy–sell agreement (80%).

If you're interested in why I wrote EVE or posts on Governance and Relationships, click on the below.  I welcome your thoughts on this or these posts and sharing is always appreciated.

Why I Wrote Equity Value Enhancement (Read Reviews Here)

Why is Private Company Governance So Elusive?

Relationship:  Mojo, Moxie or More?

Posted on May 31, 2016 .

Relationships: Mojo, Moxie or More?

Would you court your spouse the way you pursue prospects? 

How does your firm/you differentiate from competitors?  Before you answer - ask yourself “Do my competitors claim anything different?”   Now ask yourself what service/product do I provide?  If you answer is technical, tactical and/or transactional, how does that deepen your relationship if the client seldom has the capacity to differentiate? 

Do terms like “steward”, “servant-leader”, "connector" and/or “concierge” come to mind when clients/prospects seek a solution that does not center on what you’re offering?  I’d love to say I had an epiphany. Truth be told my discovery was fear based. Looking at that cold, hard truth in the mirror, I asked, “What is my relevance?” It couldn’t just be earning more.  It had to be something greater.

 As a business valuation professional, I learned identifying and measuring risk (core to determining value) was insufficient to differentiate.  So, I also offer risk management and mitigation services.  More importantly, I connect others also playing in their A-game even when no immediate benefit will be derived. So, my mojo isn’t solely what I know (30 years in), but who I know - local or national. 

Clearly, relationships are not simply ones you have with clients.  Could you imagine going to a bar looking for your future spouse and handing out your resume as justification that you’re Mr/Ms Right? This might be sufficient for a one night stand, but most people like to be courted. Not just superficially to make the sale. So, why would conducting business differ?

I have a simple test. How do you treat the assistant or receptionist when you call or visit? One can tell a great deal about a person by how they interact with support staff.

 So, as we discussed under the “G” for “GRRK” standing for Governance, the manner in which your company (its people) conducts itself is telling whether a culture exists that expects more than transactions. So, examine internal relationships. Is communication fluid and collegial?

How staff feels about where they work will influence how they interact with others external to the organization.  Would you want your key account staff (sales or customer service) to be transaction or relationship oriented? Does executive management go out of its way to meet with key clients to simply ask what their needs and aspirations are? Is there any distinction between servicing the top 10% of clients and the next 60%?

And a real test. Are suppliers, vendors, providers and advisors asked how you could improve your relationship with them? Are they asked what are some of the best practices they see when they visit competitors? They don’t have to reveal names, but what they see your competition do could be incorporated into the way your own firm is run.  All these "constituents" (stakeholders) are part of a greater ecosystem. So, are they then included when contemplating strategy or as an after-thought?

Another real test. As an advisor do you seek to meet with all the advisors with which your client and prospect works? As an owner/founder/executive do you hold routine meetings with banking, insurance, wealth, legal and tax advisors at the same time? If you see this as a cost and not an investment, what does this say about the confidence you have in the value they add?

So, the message her is simple, but its execution is not. The “R” in “GRRK” is about Relationships. If they’re an after-thought that is transaction-oriented, you have not differentiated. But what if you proactively build quality relationships within and external to the organizations with which you work? If they’re of high caliber (which means you are or striving to be), then they are unique to what you have to offer. That is a differentiation that has real mojo.

The only question that remains is "Do you have the patience and moxie to approach past, existing and future relationships as a way to develop rapport and assist in building value for others even when it may not immediately serve your own purposes?"

Isn’t that why courtship works (it’s not about just me, it’s about you…)?

Yes, I wrote Wiley Finance’s book Equity Value Enhancement (“EVE”) because I want you to buy the book and retain my firm’s services. The book’s emphasis is on leveraging BOTH Human and Financial Capital in order to supersize company and individual value. But, I pursue relationships with quality advisors and clients who are seeking more than just transactions.

I’m confident enough to stake my reputation and money that if there isn’t $850,000 or more in EVE's knowledge nuggets I’ll refund the $85.00 purchase price.  That’s a 10,000 to 1 return. Now, that’s value add and a differentiator!

Posted on May 19, 2016 .

Why is Private Company Governance Elusive?

The above question is a segment from Equity Value Enhancement ("EVE") - a Wiley Finance book ranked #1 by Amazon in its category that addresses the leveraging of both financial and human capital  while managing risk.  The first segments examined the differing optics of owners and trusted advisors. 

Governance is the next segment and is the letter "G" from the acronym "GRRK".  GRRK stands for Governance, Relationships, Risks and Knowledge.  These four areas are interrelated and believed to create more value as a sum of the parts when a holistic and aligned approach is applied.  EVE's premise is human capital is often overlooked by business owners and advisors as it takes a back seat to revenues and profits.  Human capital is not formally found on any financial statement and developing metrics are more difficult.  However, EVE shows, in fact, there are metrics and when well managed not only leads to increases in operating margins, but increases price multiples.  In turn, value is enhanced.  The following link explains why I wrote EVE.  

Most business owners first started with an idea and then executed with brute force, some cash and wishful thinking. By three to 12 months most of their dreams are nightmares. The next tier are those who created self-employment. If their compensation was applied to the salary of a manager, there is little to no profits remaining. Statistically most fail in a few years because profits are razor thin and there isn’t anything that differentiates from competitors. Yet, they work over 40 hours and often rely on other family. Mind you there is nothing wrong with a sole practitioner or a very small business.

The next tier is a high-five or lower six figure compensation ($75,000 - $125,000) founder with a solid reputation and/or a few key clients.   Growth is based upon the belief of selling more… smarter. Many deem employees and advisors as necessary expenses. If owners as clients are sufficient in quantity, providers can make a living at or near the levels of the owners they serve.

The “cut above” are the owners who earn enough to “put something away” and may see the need for advice on an event driven basis, such as needing a lease agreement reviewed by an attorney or financial statements audited by a CPA for a loan originated from a banker. These professionals may have general legal, accounting and banking knowledge. This tier tends to earn $125,000 to $250,000 with businesses reporting $2.5 to $5 million in sales. About three of four will close their doors either because there is no interest in trying to sell or no interest by most buyers looking to buy.

The $5 to $15 million annual sales companies have built some infrastructure because the owner simply cannot perform all the needed functions of the business. The owner may earn from $250,000 to $1.5 million in compensation.

However, if asked, most founders will indicate they can perform most or all of these functions as well as or better than the person(s) they employ. Many owners try to do so. As such, an advisory board aside from friends and family may be worthwhile to consider.

Because equity values can be in the millions, this is where gift and estate tax planning should occur; especially, when the owner has children or is over age 40 (sense of mortality and concentrated risk).  Yet, management turnover may be a challenge which can be based upon founder friction or compensation that may be noncompetitive. Outside advice is sometimes sought to assess, clarify, guide or mitigate decisions and outcomes.

These more complex advisory engagements are often 0.20% to 1.0% of company annual sales depending upon ability, complexity and/or scope. Again, like the companies themselves, advisors may find it difficult to express real differentiation. The involvement of allied professionals is often deemed on an “as needed basis” emphasizing cost versus benefit. While familiarity may grow with “key” advisors such as insurers, bankers, accountants and financial advisors, attorney and specialist retentions may be more situational dependent.

Arguably, it is this group, (depending upon sophistication, growth rate ad resources) and certainly $15 million and above, that would benefit from the “governance” discussion.

The next tier of $15 to $50 million in revenues tends to be about diversifying risk and seizing new opportunities either organically by new offerings and new markets or through acquisition. Few pursue the latter.   Key here is the depth of the company’s “bench” (key staff and advisors). A common Achilles heel is back office weakness where the CFO/controller may be performing more reporting functions and may have nominal private capital markets background to examine any option other than cash flow performance improvement, minimization of tax liability and use of debt. They may not know any investment bankers.

While it would behoove ownership to expend 1% of sales annually to ensure a reduction of “trees versus forest” myopia by seeking professional perspectives of outsiders, this is uncommon. The great majority of companies plateau at this point because bureaucracy becomes time consuming and ownership has reached their capability and may think delegation as giving up control. There is seldom a strategic focus because that suggests a degree of precision, planning and metrics that requires a step-back from the “let’s try this” method of managing. As long as pre-tax income is $1 million and above, these companies are candidates for a sale, but seldom at the price multiples and values wished for by ownership.

So, what removes the plateau of $50 million (respectable for sure)? A shared vision that incorporates those from within and outside the firm. This is the company’s “ecosystem” and the army of knowledge and action who are “constituents”. Their engagement is not an after-thought. Therefore, a “process” must become inherent to the way the company approaches its marketplace.  It is not only sales and profits driven, but offers a dynamic and differentiated approach to providing products and services. This requires a conscious and sustained effort to manage and maximize relationships, risks and knowledge.

So why is governance (strategy and vision development, communication and execution) so elusive? Only one out of 10 owners ever has had a business plan and fewer follow it. Mike Tyson wisely said “Everyone has a plan 'till they get punched in the mouth.”  So, given that most advice is reactive, ad hoc, tactical, technical and transactional, what are the odds of adherence to governance?

Keep in mind for simplicity sake governance is how decisions are made and how stakeholders are represented. The word suggests constraint and financial transparency, which are what most business owners will push back against. So, we’ll use terms like a holistic approach, strategy, vision, culture and innovation.  

What do all these and the acronym GRRK (Governance, Relationships, Risks and Knowledge) have in common? It’s the human capital within a company and between it and third parties (clients, vendors and advisors). Ask any Private Equity or Venture Capital Group what is among the first things they examine: Management strength, board capabilities and caliber of investors.

So Governance isn’t only about rules. It is how the founder/family’s/ management’s decisions get made and the vision gets executed. And the family business versus the business of family is a complex system.  Key is a “charter” and a committee, council and/or board that agrees to immutable principles that steer the company towards opportunities and away from activities that dilute the company’s purpose or place it at risk. This allows the company to become more dynamic as well as develop, sense and seize new opportunities. These companies influence the marketplace versus the marketplace solely influencing them.

Critical to governance is to develop a strategic framework and have executives, staff and/or advisors whose primary purpose is to be strategy stewards accountable for long-term outcomes. This is the role of a truly independent board – guiding the vision pursuit. The CEO creates a culture that supports the vision and its strategy execution. This limits disputes as well as increases trust and communication.

Yet, the common failure to implement is the investment seldom has immediate results. Because strategy implementation can take six to 24 months depending upon resource gaps and commitment limitations, few will suggest and fewer will entertain the process unless they wish to buck Einstein’s sentiment on insanity (doing the same thing over and over again and expecting different results).

I have seen company values double by making the investment. Isn’t that reason enough?  If the above is a compelling issue I invite you to consider requesting the first few chapters of EVE by visiting my website or Amazon.com to buy.

Posted on April 25, 2016 .

What is an Über advisor?

Even before the ubiquitous transportation disruptor UBER was formed, several seasoned colleagues and I formed our first Über Group in 2008.  I went on to form seven such groups. The “groups” comprised of 8 to 15 professionals with 20+ years of experience who were “connectors”.  A connector is a proactive role putting vetted quality advisors together with other advisors and clients.  More than just a “warm” referral, but one in which their gravitas is assured.  The professions had one degree of separation such as bankers, attorneys, accountants, insurance and wealth advisors. 

But what made these select few “Über”?  It was the fact they first saw themselves as client stewards and not solely through the lenses of their professional skills. Liken their activities to a concierge that anticipates issues and opportunities.  They provide unique, private assistance geared to the specific needs of a specific individual. They are the 21st Century version of “consigliores”.  While usually ascribed to the movie “The Godfather”, the meaning is counselor to leadership – “The most trusted advisor”. 

Similar to bank tellers being phased out by ATM’s, many financial advisors are being slowly replaced by automation – robo-advisors.  The wisdom is “rank and file” investors don’t need the human interaction as asset allocation to balance risk and reward can be performed by programs.  I can see it now.  The value of equities held declines by 15% and the investor dials a call center.  “Press One if you want to know what happened.  Press Two if you want to be told you’ll be okay….”  You get the idea.  I digress.

In a book I wrote, Equity Value Enhancement (“EVE”), I propose many professional advisors tend to unwittingly commoditize their services.  How?  They define themselves by what they do versus what their clients need.  This means their “optics” are tied to what they know and how they’re compensated.  This creates myopia.  As one can imagine a fee for service mindset often finds it difficult to articulate the difference in offerings from others.  If the claim is quality, timeliness and service (“relationship”), who among one’s competitors isn’t claiming the same?  This thinking is transactional, tactical and technical.  It is usually ad hoc and almost always reactive.

Differentiation is a bitch.  So unique (emphasis on cutting-edge, over-the-horizon, uncommon, data analytics) knowledge is a must.  This takes a degree of “what if?” and “what this might mean” intellectual rigor and due diligence most simply are unable or unwilling to expend.  That is still okay as long as you know who does know and are placing a prospect’s or client’s needs before fear of losing them to another. How does one know whether one has Über relationships?  Are advisors making, writing or reading the news?  Are they attending the conferences or are they the presenter or on the panel?  

So, why I wrote this missive and the 368 pages of EVE is to show both advisors and business owners just how much an impact an Über or “most trusted advisor” (“MTA”) has on managing risk and enhancing the value of both the advisors’ and their clients’ businesses.  This will be done in four parts using the acronym “GRRK” (pronounced “Greek”).  Part One will address Governance (Strategy, Culture, and Innovation).  Part Two will address Relationships.  Part Three will address Risks (almost half the book) and Part Four will address Knowledge. 

If you can’t wait for these four parts, you can go to www.carlsheeler.com and request a complimentary preview of the first few book chapters or order the book at www.amazon.com

Below is a video that provides 20 minutes of knowledge nuggets covered from learning from 1000+ business owners and trusted advisors during the past 25 years.  Sharing their wisdom allowed me to be honored by the Alliance of Merger & Acquisition Advisors as Midmarket Thought Leader.


Posted on April 11, 2016 .

Valuation or Value Creation?

After 25 years, I understand most see “what’s the [business] value?” as simple as determining the cash flow and the price multiple. Something that looks like $1,000,000 x 5 = $5,000,000 where the $1,000,000 is the economic benefit; 5x is the price multiple (risk/reward) and $5,000,000 is the value.

In the world of LegalZoom and TurboTax, it is easy to assume there is either a “Rule of Thumb” (“ROT”) or software that provides a value result. Sadly, there are such offerings in valuation, which is why some indicate that the result opined is “as much art, as it is science”. It also helps explain why both trusted advisors, clients and prospects ask “how much?” instead of “how good?”

I’m sure I would offend an attorney who drafts agreements and other legal documents if I distilled what s/he does as something that is commoditized. I would offend a CPA in the same manner. And I would offend the banker, wealth advisor or insurance professional if I commoditized their offerings as nothing more than rates and terms.

Why? Because there are so many individualized issues that a “cookie-cutter” approach would likely miss that the years of education and experience would be needed so the issues weren’t missed. I wrote Equity Value Enhancement (“EVE”) to dispel these service-is-a-commodity myths and over-simplifications.

Let’s deconstruct the valuation paradigm. I might agree before Daubert  (court case requiring applying scientific method replaced knowledge had to exceed what was known by a layperson) replaced the Frye standard. Before increased access to technology, a great deal of assumptions were necessary to opine a privately held company value. Hence, the “art-science” claim had merit….. then.

However, with the availability of comparative and industry data, company performance metrics such as growth and profitability can more readily be obtained. This allows an analyst to stop comparing a company against itself (trend analysis) and offer good metrics of what “solid” company performance in a specific industry might look like.   This is further assisted by increased industry transactional data to see what price multiples have been paid for same or similar profiles to the company being valued.

This research, analysis and synthesis makes determining the likely economic benefit ($1,000,000 in the example above) more supportable. Most experienced full-time valuators would agree. So, what about the price multiple (also known as the discount rate or capitalization rate shown as a percentage of risk/return expectation under the Income Approach)? This is the issue that separates the skilled analyst from those plugging in information into a software that spits out the result.   Stated another way the price multiple or rate is about the past and future risk of achieving the same or higher economic benefit.

So, if 5x represents the risk, 4x would be more risky (value would be lower by 20%) and 6x would be less risky (value would be higher by 20%). So, how did the analyst derive the 5x versus the 4x or 6x? Given that 6x would result in a value that is 50% greater than a 4x ($6,000,000 versus $4,000,000), it stands to reason that a degree of due diligence and intellectual rigor is necessary to provide support for the level of risk. Software generated results and ROT simply cannot adequately capture these company specific risks.

And notice, thus far, all issues expressed above are financial and operational. EVE literally dedicates 100+ pages to these types of risks. Thus far we have addressed financial metrics, but businesses are a living organism comprised of people, ideas and actions that financial statements don’t adequately cover.

While we know that the top line (revenues) and bottom line (profits) are important, much of the factors that influence value are not recorded on financial statements. I have distilled these factors using the acronym “GRRK”, which I pronounce as “Greek”. These factors concern human capital.

The “G” stands for Governance which includes company culture, innovation, structure/policies and most importantly -strategy.   So, a simple example would be to determine the level of management turnover and whether an articulated strategy exists and is being acted upon.

The first “R” stands for Relationships, which includes not only internal organizational relationships and those with clients, but those with a board, trusted advisors and vendors. How are these relationships being managed? Are they more transactional in nature or are they deeper creating synergies?

The second “R” stands for Risks. While this issue is very comprehensive, how a company goes about identifying, measuring, managing and mitigating risks and seizing opportunities will indicate whether it is reactive or proactive. It will show whether a company optimally leverages the relationships. Unless a valuator masters this, s/he is prone to follow a “check-the-box” recipe with nominal support identifying and quantifying this important factor of valuation.

The last letter “K” concerns Knowledge. This comprises both the ideas and innovation acted upon internally as well as those obtained through relationships and combinations. Uncommon knowledge when leveraged provides a significant competitive advantage which is difficult to replicate. This is what allows companies to differentiate and is why human capital is not simply “goodwill” as it also represented in the “GRR” of “GRRK” as well.

The purpose of this missive is to demonstrate, like other differentiated advisory services offerings, the determination of a business’ value is more than crunching numbers. It requires sufficient knowledge of operations and environment – a software generated result is inadequate. Commoditization reflects a lack of understanding of what a “good” work product looks like and its true worth.

This brings us to the bridge between valuation and value creation. There’s a significant increase in organizations and offerings for business enhancement services where data obtained from a client will generate an attractive looking software generated report that purports to flag company deficiencies and strengths. Once these elements are addressed, the provider claims s/he will be able to increase the value of the business. Quite a few of those who are attempting to apply these principles to generate more business revenues neither possess the industry knowledge nor the strategic and operational acumen to master much less effectuate the changes necessary.

As I have endeavored to compress 25 years into this missive, I liken the above to offering Fen-Phen (claimed weight loss pill that resulted in deaths and was unceremoniously pulled from stores’ shelves) versus the more practical and pragmatic diet and exercise. The latter may not be as appealing and takes more effort and resources, but the results are proven.

So, what do valuation and value creation have in common and where do they differ? Valuation is a performance benchmark as of a particularly point in time. A well written report will identify and measure the risks that led to the rates and multiples opined by the analyst. However, if the owner and advisors are interested in getting from “here to there” and wish to enhance the company or equity value, they must also manage and mitigate risk. This takes a holistic effort with an executed strategy involving skilled and invested stakeholders who must have the humility to align their own needs with that of the owner.

EVE provides the framework from elevating from management to mastery by leveraging human capital.

An interesting side-bar: When valuation analysts are asked to "discount" the value of owning a minority interest, what the client or prospect is actually asking is to reflect the asset, enterprise and equity level risks that support the impairments of ownership.  In other words, the equity level is seldom the same value as the percentage interest of the whole, so some degree of concession is sought.  The empirical support is how risk and volatility influence the liquidity (market demand and pool of buyers).  It, too, is not simply an arbitrary figure.

Why I wrote Equity Value Enhancement - LINK:

Posted on March 21, 2016 .

Bezos, Cuban, Schwab & Winfrey have "EVE". Shouldn't you?

"EVE" = Equity Value Enhancement.  Folks smarter than I defied conventional wisdom and supersized their companies and their brand.  EVE is about what they did:

1) Leveraged human capital;

2) Mastered risk; and

3) Ensured every $ spent was leveraged.

Say, a very successful business owner works 60 hours weekly and receives $15 million in annual compensation equating to $5,000 hourly.  You have two ways to be a hero if you're trying to win this prospect's business.  You can save the client time.  How much would you pay if someone saved you 100 hours annually (in this example $500,000)?  The other is: Can you provide 10x or more for every dollar in fees or commissions?

As a "Strategic Value Architect", I see these pervasive opportunities and endeavor to work with owners and advisors to be value stewards for their very best clients.  I'll use a CPA as an example.  If most CPAs are tasked to keep taxes to a minimum then how do they add value? 

What if the owners had funded their buy-sell agreement with life insurance? What if the CPA and owner discussed how the owners used their time?  What if new equipment produced twice the widgets in half the time at their company?  What if the building's depreciation was accelerated by applying cost segregation?  What if company debt and line of credit were better managed?  What if bylaws were updated? 

Owners and advisors alike often assume value is derived from levels of revenues and profits.  That's only half the equation.  The other is the level of risk and human capital leverage.  Assume a debt free company had $5 million in profits (free cash flow) and as historically operated was given a 5x price multiple (the multiple reflects risk and opportunity on a going forward basis). This provides a $25 million value. 

Now assume the CPA's involvement results in $6 million in profits even with new debt (and interest payments) to acquire equipment; the bylaws are updated; life insurance is purchased; and, the owner now works "on" versus "in" the business.  The price multiple increases to 8.5x and equity value is now $51 million - $26 million in "new" added value. 

Let's say to achieve this the CPA and other advisor commissions and fees were $260,000.  BAM!!!  That is a 100:1 return on investment! 

So, you have two choices:  Business as usual (See Einstein's definition of insanity above.  How's that working for you?).  Or like Jeff, Mark, Chuck and Oprah who have a copy of EVE (it's true), you apply these and hundreds of knowledge nuggets in a #1 rated Amazon book - EVE.

If you want a preview (first few chapters free), click here

If you want a money back guarantee, click here to order EVE. 

Posted on February 10, 2016 .


Who doesn't love factoids.  In the 12/21/15 edition of Barron's, a study by PwC and UBS found that in 20 years only 126 of the 1995 billionaires (289) remained on the list.  Business failures and family dilution were among the reasons provided. Did the heirs destroy or divest the asset that created the wealth?

No doubt gratification versus growth is a real business owner paradox.  When we hear most businesses have $1 million or lower annual revenues, what do we think?  First, you don't bank sales.  You bank net proceeds.  Then we wonder why after a few or many years these businesses never really grew.

While most prefer "baby" I will refer to these businesses as "the beast".  Why?  Because most parents would never consider raising a malnourished child, but many owners will take cash needed to grow a business to pay for their own wants.  (Notice I didn't say "needs".)  So toiling 60 and 70 hours isn't enough to grow a business.  It needs adequate cash ("capital") or it starves.  Capital can be obtained from the profits of the business or borrowed or invested funds.

A tell-tale problem is when a line of credit (debt) is tapped because revenues, collections or profits dip and the owner still wants (or needs) compensation even when the funds from the beast's operations or reserves (piggy bank) aren't there.  These behaviors are quite common and often explain why most companies can't be sold as they are essentially a "job" created for the founder and the "baby" is only beautiful until it isn't ("the beast!"). Few buyers want it.

Less common is after years of toil, the business generates more sales and profits.  The owner craves a reward for the sacrifice (and too many PB&J sandwiches), so seeks compensation a little too much too soon.  This partial abstinence may allow the company to reach $5 million or even $10 million in sales; however, most companies hit this growth ceiling due to both financial and human capital reasons too many to address in this post.  My Wiley book "EVE" addresses these issues ad nausea in a reasonably entertaining way.

Let's pull out the calculator and perform a VERY simplistic scenario.  Assume no inflation. Owner "A" decides to over-compensate both salary and distributions and in 20 years with the following results:  The business "needed" $200,000 to fund "typical" 4% per annum industry and market level growth and could have achieved 10% growth if $500,000 had been wisely reinvested in the company. 

Let's say the business was worth $5 million and paid the owner $250,000 per year, but the owner took another $500,000, so growth is an anemic 2% per year.  If the owner is operating a "lifestyle business" versus reinvesting the extra $500,000 in marketable securities or investment real estate each year in a personal account, then the "extra" amount received equates to 20 years times $500,000 (maybe more and maybe less - this is for illustration purposes) or $10,000,000 for gratification plus the $5,000,000 in company value plus the 2% compounding for the 20 years (an extra $2,430,000) or $17,430,000.  The $7,430,000 company and some nice toys are to show for the 20 years of effort.

Owner "B" defers gratification preferring growth.  This owner enjoyed a 10% year-over-year compounded growth and as a result had $33,700,000 value to show for 20 years (and likely has other investments) while still maintaining an upper-middle class lifestyle.  It is clear the benefit of compounding provides almost double the economic benefit when considering Owner A's gratification.

Now that $33,700,000 figure is relevant as it constitutes what is referred to as Ultra-High Net Worth (UHNW).  According to Wealth-X, there are about 70,000 individuals in the United States who are UHNW.  Most are facing the scenarios in this post.  My function as a Strategic Value Architect is to ensure they or those wishing to join their ranks achieve the highest possible enterprise value while also considering philanthropy and tax minimization.

So, what has this to do with the "Shirtsleeves to shirtsleeves" challenge?  In our example, Owner B was 30 when the business was worth $5,000,000 and 50 when it was worth $33,700,000.  Care to guess what age 65 would look like at this rate?  If you said a $142,000,000 value is likely you'd be correct.

Now assume the business stayed in the family and the same business growth (from expanded offerings and markets) was sustained with each of three adult children having an one-third interestAssume magnificent tax planning and each child is a triplet and has the same deferred gratification principles as the founder and spouse.  Their one third interest is valued at $47,333,3333 ($142,000,000/3) when they were 40 and the founder was 65.  They operate the business for a generation or 20 years. If you guessed that each equity interest owned was worth ~$200,000,000 when they reached 60 you'd be correct.

What would happen if the founder's advisors had suggested not maintaining concentrated risk (keeping in mind their wealth was created by doing just that). Will the family benefit from control if they sell 100% of the equity?  Does the family need the liquidity?  What are their other options to include family legacy or hiring professional management for the company?  How would the financial institutions manage the proceeds from a sale?  Would they be more risk adverse?  Would they select a passive portfolio? Would it achieve the levels of yield and growth (total return) that would allow the family to maintain their existing lifestyle(s) or would principal erode as the founder and spouse spent it?

I intentionally eliminated the specific annual spend of the family members; however, wanted to illustrate that even with the "dilution" by having three children receive the valuable asset(s)/interests the worth was "greater" than when it was received by almost four-fold, 20-years later.  This ought to raise the question of whether risk aversion and not necessarily risk alone may, in part, contribute to the decline in wealth from generation to generation.  In fact, even a reasonably responsible beneficiary could prevent the erosion of the principal while keeping the business asset by maintaining a minority or majority equity stake if family members may not wish to operate the company.  This may be seen as a "messy" option by some firms looking to administer family wealth.

The conversation ought to focus on whose risk optics and who has skin in the game and how do all of these parties get compensated.  That is why liquidity, legacy, leverage and learning must be part of transition event planning.  This requires an independent perspective with the wherewithal to ensure advisors and families are aligned when such important decisions are made without inadvertently placing biases or short-sightedness into the mix.  Consider the additional "mess" of a disruptive event like death, disability, divorce or dispute.

My financial peers may admonish me.  They will argue "reversion to the mean," which suggests most investments at some time will not continue to perform in the top-tier of their peer groups due to a myriad of issues.  This is true as a general statement, but the very premise of a 9- or 10-figure company suggest families can succeed in beating the odds with organic growth and M&A.

The issue of stewardship versus cashing in might be settled in practice, but not in theory.  I leave this to the post reader and welcome your thoughts.  If you liked what I had to say here, please share with your followers and feel free to read these other thought-provoking posts.

Why I Wrote Equity Value Enhancement ("EVE")

What top 1% of advisors and entrepreneurs know

What is your risk vs. opportunity optics?

Keep some powder dry ("liquidity") for 2016

Brooklyn-born, USMC Tank Officer & PhD Writes Wiley "EVE" Book


Posted on February 2, 2016 .

What top 1% of advisors and entrepreneurs know



Last week I raised what may be argued to be two straightforward questions on LinkedIn Pulse and promised to answer them.  They are:

What is the difference between an economist, accountant and a finance professional?

What is the difference between cost, price, value and worth?

Before I reply, I will share it is rare to respond correctly, which is both the challenge and opportunity that prompts me to share this post and write Equity Value Enhancement ("EVE").  No, B.S.  I do want you to buy the book or take the time to review the first few chapters for free.  You'll then see why it was important to capture and share what 1200 engagements in 25 years has taught me.  In short, the top 1% have mastered two principles of leveraging human capital and managing risk by investing in unique knowledge and relationships.

I digress.  Remember in high school that there were A-students, B, C and so on?

Auto insurance and repair businesses know that we can't all be "great" drivers even though when asked most respond they are.  In the business world, there are those who push themselves to strive, question and answer.  There are those who show up having earned the right to practice their profession and those who "dare greatly" to make their own paths instead of following others.  

Let's take the practice of law.  Having worked with hundreds of attorneys, there are varying competency levels and personalities as there are disciplines.  So, a solid generalist may be ideal for some matters; whereas a trust & estate litigator may be preferred in others.  The layperson might understand the two differ, but we can't assume this is true.  They don't know what they don't know. 

Let's take the practice of accounting.  Many use the general term accountant or CPA; however, within their profession, there are those whose discipline is primarily business and/or personal tax returns; others that focus on audits; and others are compliance oriented.

The point is that not only are there gradients of ability, but also specialization. 

Not all are great students or drivers or service professionals.  Now consider, the amount of resources owners expend working with existing professionals and those vying to secure business away from these relationships.

If owners see these services as necessary does this equate to their having value or are they expenditures that come down to rates and commissions paid? The provider will always justify s/he is receiving a fair amount (akin to that we're all good drivers).  However, if other providers can render the same services or relationship "quality" at the same levels, no differentiation is provided.

In fact, by negotiating fees when clients/prospects may not have a full understanding of what is being received frames the discussion of the offering as a commodity.  (What question would a patient likely ask a heart surgeon even if the patient does not perform surgery?  Is it cost or success rate?)

Providers can end up compounding the "fees/rates" issue as they are easy measures when they are sourcing other needed services they're unable to provide.  Give witness to the "not enough detail to determine scope or complexity" inquiry of "So my client needs 'X', what will it cost?"  This all too common exchange occurs because most fellow professionals do not or will not take the time to genuinely understand what constitutes a quality deliverable from an "adequate" one.  The real fear of god issue is what is the impact on the client and when will it present itself, such as an audit or dispute?

Then there is the issue of synergies.  Most advice is ad hoc, one-off, technical, tactical, transactional.  Each profession based upon its own orientation may see a solution.  The age old analogy of describing different body parts of the elephant, while never ensuring all looking at the same animal may have differing and conflicting vantage points.  This, too, is all too common owner predicament, which compounds the frustration and hesitation to act.  Think inefficient at best and ineffective at worst.... and that assumes all are competent professionals.  Is it any surprise the prospect/owner wants to minimize what s/he's paying?

So, what the 1% does that is different from others is know the answers to the two questions above.  They require a strategic ("holistic") approach that aligns advisors and owners, which forces them to play an A-game, which includes collaboration and cohesion.  The owner will always be willing to pay a premium for receiving something above the rate and/or commission as the return of value that is provided far exceeds that amount paid.  The provider's success becomes the owner's success as is the converse benefit to the provider.  

The above links are for a reference guide  that is replete with knowledge nuggets and these optics from both owners and advisors.  Who better than a Strategic Value Architect to build this tool so owners and advisors can add value?

As the quote from Warren Buffet above indicates and Oscar Wilde admonishes the trap of 'knowing the price of everything and the value of nothing'.... now the layperson can answer (needless to say the above discussion provides indications of what happens when the differentiation can be made).

COST is what is considered and the benefit of what an alternative would have given. PRICE is the amount paid in return for goods and services.  VALUE is the measure of the benefit believed to be gained from the goods or services for which one is willing to pay, which may or may not be its WORTH.  (A simple example is if it cost $0.15 to produce a jug of water and it was sold between a price of $0.75 to $1.25 would you pay $1.25 if it was the only selection available?  What's its value if you hadn't had any fluids in three days and would you be willing to pay $10.00?  How about if that gallon was poured into a pool of water and it was the difference between drowning or not?)

ACCOUNTING is concerned with the gathering, reporting and analysis of business transaction data according to the principles of relevance, timeliness, reliability, comparability, and consistency of information or reports.  The social science of ECONOMICS studies the production, consumption and distribution of goods and services through the behavior of people, companies, industries and nations to evaluate and quantify why they're doing what they're doing.  The science posits that capital should always be invested in a way that will produce the best risk-adjusted return.    Whereas, FINANCE actually figures that process out as it reflects investing decisions and risk management.  It is concerned with the time value of money, rates of return, costs of capital and optimal financial structures. This recent Yahoo Finance piece is an example.

So, here's the thing.  Care to guess which profession performs the most business and equity valuations and which profession requests it?  It's not Financial professionals.  These practitioners tend to perform two to four per year.  If we assume mastery equates to 10,000 hours as a minimum and three valuations take about 100 hours; then mastery would take no less than 100 years.  Yet, it is common practice for advisors and owners to make a retention selection on the criteria of fee.  This reminds me of the Best Western commercials where the well slept guest feels good enough to be a surgeon.... just that he's not.  And second to ourselves and families, what is the most valuable asset owners have?

This type of issue has incalculable consequences and lays business owners bare to consultants and advisors who may be well intentioned simply because the time to at least distinguish what "good" or "great" is strains commitments of time and importance.  That is in part why EVE is a timely book (Pulse Post received 2,000+ views) as the largest number of business owners are baby-boomers and most have no idea their susceptibility to the fee versus value received equation. 

Now the reader understands why some advisors are paid for performance and why some owners grow $50 to $500 million companies.  They leverage human capital while managing risk.  It's simply not financial and tax engineering alone.

Nothing says love like commenting on a post or sharing it with your thousand closest friends.  Is it a great idea if like a tree in the woods falls and there is no one there to hear it does it make a sound?   :  )


Posted on January 28, 2016 .

What is your risk vs. opportunity optics?

First things first.  (I'll answer the two questions below in my next Post; however, I invite the reader to respond as the replies may be illuminating.)

What is the difference between an economist, accountant and a finance professional?

What is the difference between cost, price, value and worth?

If there is a series of transactions of public stock between sellers and a buyers ("investors"), then there are two unique things occurring.  The amount between the ask and bid is referred to as a "spread".  Somewhere between is where parties agree and a transaction is consummated. 

But in those unique transactions, the buyer believes there is upside potential unique to the specific investment and the seller believes that liquidity or an alternative investment is preferred.   Can they both be "right"?

This takes us to the notion of if the majority of advisors or investors are acting on bullish or bearish behaviors can they both be "right" or do they cause the "herd" to create a self-fulfilling prophesy?  (It's a contrarian play!)

So, we go full circle to the issue of "risk".  Whose risk when and why?  Let's start with individual choices.  While many wish to become entrepreneurs, fewer actually do.  And among those who choose the entrepreneurial route few succeed to remain in business and a few more have created a job and some degree of independence, but not much else.  So, the pyramid getting from $1 million in sales to $5 million narrows and to $10 million to $25 million narrows more with those achieving $50 million and above rare.  They have mastered not just their product and service offerings, but have been adept at managing both their financial and human capital as well as risk. 

Admittedly, there is an ongoing founder struggle with gratification. versus growthThis means the founder chooses the sum to be paid for time, ability and risk versus what is to be reinvested to grow the company and receive the reward of a higher value.  Most would be shocked to learn if the company fails to have an adequate amount reinvested versus the shorter term benefit, this is a primary reason for being stuck at $5 or $10 million in sales.  Worse, the value can be many fold greater due to compounding in as short as just 10 years.

Then there are those who prefer the reliability of steady pay with some aspiring to become CEO, Managing Partner or tenured one day.  Similar to professional athletes, there are many who aspire, but few who actually achieve these outcomes. 

So, when an advisor working at a financial institution, law or accounting firm suggests to an entrepreneur they should mitigate risk, the real question becomes risk as opposed to what?  The common answer is diversification and often this means publicly traded securities.  Yes, this might result in less risk and more liquidity, but it does also mean less control.  This is why many an owner is hard pressed to act on such advice in a big way as the advisor doesn't have shared skin in the game or may economically benefit by the prospect or client acting on the suggestion.

So, as another example, the accountant may focus on the "risks" of taxes.  How does that influence risk of the performing asset, such as an operating business or real property holdings?  Stated another way, if you were earning $1 million in profit and paid 40% in taxes, but could earn $2 million and pay 40% in taxes would you select the $1.2 million over the $600,000?  So, don't let the tail wag the dog.

Then there are the issues of asset protection tabled as a way to preserve principal.  Again, the common end game tends to migrate to liquidity and diversification.  If an owner is pocketing $2.5 million annually and spending $2 million annually and then sells the asset for $20 million net and can expect 4% after tax, this produces $800,000 in annual spendable funds.  Unless the prospect/client expects to reduce his expenditures by $1.2 million a year, the viability of protecting principal is an artificial construct.

So, what "is" the solution to the above realities?  The asset would have to net at least $50 million to generate the $2 million annual spend (pre-tax).  If the the prospect/client relies upon the trusted advisors who are unable, unaware or unwilling to assist in enhancing the value by another $30 million are their ideas of "risk" aligned with that of the person they're seeking to serve?

Stated another way, if the client "knew" that services rendered would be billed for  $300,000 or even $1,000,000, but would produce the $30 million increase with a return of 100x or even 30x on fees expended would they agree to doing so?

Then there is simply "out-of-the-box" options.  Options may include hiring an industry executive who would be all too happy to have a salary plus participation in profit and/or value growth (of course that would mean that parties would have to know the benchmark value).  It might mean hiring an MBA student as an intern to learn the industry while the MBA educates the founder on best practices.  It might mean grooming key staff for more important roles.  It might mean selling a minority interest to a private equity firm that has the funds and personnel and contacts unique to the industry.

The next time a client, prospect or a trusted advisor from a different profession asks what are your fees and commissions, it is more likely they have little knowledge of the answers to the first two questions raised above.  The entrepreneur knows there are risks and has had some success in seizing opportunities.  Perhaps the question is how do advisors prove their mettle to be more worthy of the services they wish to provide and is there a distinction between the solutions they offer that reflects a track-record of helping past clients grow their businesses to 8- and 9-figures or more?

Equity Value Enhancement (Amazon Link) was written with a focus on risk identification, measurement, management and mitigation.  It suggests that most can have a reasonable influence on business' finances (sales and profit growth and adequate levels of capital).  The challenge is the human capital which calls for having a legitimate strategy (versus tactics) to leverage uncommon knowledge and relationships to influence risk.  (The lower the risk, the greater the multiple and closer to the $50 million target in the example above.  More to the point financial capital alone won't buy its way to the target without a merger or acquisition or a holistic approach to harness the human capital of advisors, owners, staff and other stakeholders.)

LINK: Why I wrote "EVE"

LINK: #1 Amazon Book in Category

Posted on January 27, 2016 .

Keep some powder dry ("liquidity") for 2016 private & public equity opportunities.

1.  Up to 2007 many public companies' share prices were higher due to use of leverage (debt) of companies and the "artificially-rich" middle class (using home equity loans) playing the market as most investments were only going up.

2.  These retail investors after seeing much of their windfall and principal erode in 2008 and 2009 went to the "safety" of low yields where earnings were 1/100% or 1/10% on every dollar held against the backdrop of the 2% inflation rate.  No way, with those returns, were they going to recoup their equity losses.

3.  The U.S. government creating market liquidity and velocity embraced a fiscal policy to print money (trillions of dollars) and inject it into our economy.  These funds made a Wall Street detour.  Institutions having taken a heavy hit in their investments and needing to recoup returned to the market to get their share.

4.  Despite the global financial malaise (and likely due to abundant shale and a glut of cheap oil) more affluent families and companies are "reporting" better results because all those dollars flooding the market were injected into the equities eventually creating "performance" at or exceeding 2007 levels.  A "rebound".... using a deflated 2015 dollars for comparison.  We dodged a bullet as the balance of industrialized nations did the same thing... later.  Now most nations ~ i.e., taxpayers, have taken on additional debt.  Add an influx of retail investors (late to the party) trying to restore their 2008 and 2009 losses.

5.  While the low interest rate environment wasn't so great for folks on fixed income and savers; it has been a boon to working families, corporations and for the housing market.  Who doesn't want a low-interest rate new car or 65" flat screen television?  (Yet, credit card rates haven't declined, but balances have returned after folks went cold-turkey from their buying sprees.) But these prices and rates are artificial contrivances with no correlation with risks that influence their levels.  As rates rise, home price growth will slow and so may the economy 

6.  Wall Street has little to do with main street.  Modern portfolio theory has almost nothing to do with individual company performance; hence, the distinction between a market of stocks and the stock market with the former requiring due diligence and deep analytics.  Do institutional investors, who represent the majority of stock trades, really believe the daily pundits of what's causing the market's rise or fall?  What does quarterly performance have to do with legitimate mid- and long-term performance/market risk?  If 2007 share prices were a result of corporate debt, what is driving the high prices now? 

7.  Are GOP members fiscal conservatives, when the left uses higher taxes and the right uses debt to pay for what special interests want?  Likely both presidential candidates after the primaries will feed from the Wall Street trough. Somehow they'll convince the working- and middle-class struggling to support their families and pay for their kids' higher education or vocational training that their parties' fiscal policies will be job creators if just the right skills were held.

8.  If Warren Buffet's selections have the Midas touch, why don't most follow his selections with the same net returns?  Because he uses a major insurance company that shields most taxes and selects boring companies whose steady growth compounds.  Who needs homeruns if you can double the value with steady growth every six years.  His own estate plan and two Economics Nobel Laureates have indicated index funds are the best hedge for buy-and-hold investors and low loads (costs).  This is why Vanguard is the behemoth it is.

9. So, what does this have to do with keeping powder dry?  Most investment bankers know there has been a steady decline in many sectors for midmarket company transactions since 2H15.  Yet, too much cash chasing too few deals has kept values inflated.  Then there's the herd of institutional advisors endeavoring to attract the mildly or more wealthy to follow a common path creating a self-fulfilling prophecy of marginal performance as the majority can't all be on the buy or sell side.  Seldom does conventional wisdom create massive wealth.  Ask any entrepreneur with concentrated risk.  It is they and the contrarian value and activist investors digging deeper who can.  If the music stops creating illiquidity and a downward pressure on equities 2016 is likely to be a buyers' market. 

10. If the market correction is more abrupt than in 2008, many opportunities will be abound in the broader market.  Yet, many $50 - $500 million companies (public and private) are already fairly priced or below market because they're thinly traded or private.  (LINK) This due diligence and operator skills is not simply a matter of financial engineering.  Often values are influenced by board and management decisions with an almost slavish focus on revenues, profits and taxes, instead of the risks that can often most influence equity price multiples

Am I being a prognosticator, a pragmatist or a pundit?  What does your crystal ball say?

Posted on January 11, 2016 .

Brooklyn-born, USMC Tank Officer & PhD Writes John Wiley "EVE" Book - It's about human capital

Why I wrote EVE Post   Amazon Book - EVE Link    Free Book Preview

When I'm on stand in court testimony I find the contradiction of my background to some is an opportunity for levity.  The combination suggests I might be able to deal with large figures; however, must remove my shoes and socks if the result is above ten digits.  This modest approach connects with the jury as while my background might be formidable, I don't take myself too seriously.  No ego.

Another leadership trait I learned in the military, as a corporate executive and entrepreneur is the notion of "skin in the game".  There is a significant difference between administrating, supervising, managing and leading.  If one is to lead, they must respect how to follow.  Further, they must be willing to sacrifice for the greater good when it's not convenient to do so.  Putting others first as a servant-leader is not naturally hard-wired even with service providers; yet, real value is garnered by others when we are willing to sacrifice. 

This raises issues about authenticity and leadership.  As professional service providers, we're often searching to find who needs our services in context of a client challenge.  This is akin to the belief, "when you're a carpenter with a hammer everything looks like a nail."  Juxtapose the issue to "what is this person looking for and if I'm not the right fit, can I source the provider who is?"  The latter mindset is one of a concierge.  A concierge versus a technician not only gets a seat at the desired table, but by solving an issue even when it does not immediately benefit the expenditure, earns the right to sit on the same side of the table as the party requesting assistance.  Now that is the type of leadership that builds deeper relationships and referrals.

Yet, nothing bruises self-confidence like a dose of reality.  It's hard to be a trusted advisor.  Love the work.  Usually like the clients.  So-so on those advisors who jockey-around protecting their "turf" and seek justification of my worth and theirs like jackals at a watering hole on the Serengeti.  My jugular gets exposed. 

Like literally millions of professionals before me, we studied hard and worked harder to get to a career zenith.  Yet, like drivers who are asked about the quality of their skills, we can't all be great.... the auto insurance industry claims prove otherwise.  Working hard enough to make a good living is not the same thing as making a measurable difference - the latter is exceptionalism.  Yet, a livelihood and a life well-lead are often seen as one and the same. 

The blocking and tackling between fellow solutions providers about fees or commissions for service - year over year - has suggested few see the value they bring (myself included) much less value others offer, which seldom has anything to do with what they charge.  Even if Equity Value Enhancement's ("EVE") 35 years of jaw-dropping experiences had thousands or millions of dollars worth of insights would the $85 list price have anything to do with its value?  (Under one's breath being "who has the time to read the thing.... business as usual....")

While I enjoy what I do, I am passionate about three things:  being a steward/"consigliore" ("chief-of-staff") to align and leverage professionals' knowledge and relationships; being well-compensated for my strategy, risk management and value creation advisory services; and, spending time with four-legged animals and down-to-earth, two-legged folks outdoors away from the rat paths many follow to and from home and work and places to dine and shop.

Why I wrote EVE Post   Amazon Book - EVE Link    Free Book Preview

So, the above sharing is to demonstrate one of hundreds of points within EVE, which is much more than financial engineering and reporting.  Rather, it is about the nexus of financial and human capital. 

As an example, while a conversation starter is often what you do, where you live/grew up or where you were educated... many see this as a way to determine social pecking order.  An alternative might be "How did you come to do what you do for a livelihood?  If you weren't doing this, what career path might you have selected?"  And, the ubiquitous "what keeps you up at night?" might be replaced by "What excites you about what you do?  What is your top challenge or opportunity (might receive a personal or business reply)?"

The point above is one path tends to be a "transactional" mindset.  The other tends to be relationship oriented.  The latter focus is on who one is as a person versus what they do for a living and are they a viable client.

While I'm not beneath pandering to sell EVE, I'm much more interested in personal and professional relationships that provide a win for clients, those with whom I collaborate and puts a dent in my student loan balance.

So, my jugular is exposed.  What say you?

Why I wrote EVE Post   Amazon Book - EVE Link    Free Book Preview

Posted on January 3, 2016 .

What is the difference in having $100,000 in personal assets & liabilities and $100,000,000?

The first response might be they're the same as each liability zeroes out the assets held.  Simply put the simple math is $0.  Is it?  Really.

Au contraire.  Those holding the notes are less likely to accelerate payment on $100 million as this is a big chunk of change to have to write down.  They may be more conducive for restructuring.  They might wish to swap equity for debt.

There is often confusion between value ("worth") and price (what's asked).  Further, when reported as a single number, the value is more so  central tendency versus shown as along a continuum.  The spread between "ask" and "bid" for common lesser assets tends to be in a narrower range.  Think cookie-cutter starter homes versus McMansions.  Since, value may be more intrinsic for larger assets like a portfolio of real property, risk and opportunity assumptions may differ sufficiently that there is adequate variance for "up-side" potential. 

Then there is another fundamental issue.  What is the work versus wealth income in the two scenarios?  The latter deals with income that is primarily generated passively.  The former is the income capacity of the party in debt.

Finally, what are the nature and the value of relationships of the party with $100 million in assets?  Can they access personal guarantees?  Can they convert some assets to more liquid capital with the help of others?

Sure, the fall is steeper for the $100 million, but it may be more gradual when options abound.  It is this simple example of the optics of risk and opportunity and through whose lens examination must be made.  What's your view?  :  )

Thanks for allowing me to share.  Carl

Posted on January 3, 2016 .

Be part of 1,000,000+ "mob" to support veterans & horses by doing good for business owners-12/29! December 22, 2015

Author's Web Site:              Wiley Book Site:                Amazon Website:

Would you believe this book contains 25 years of the best practices of the most successful business owners and executives as well as their most trusted advisors?

100+ reviewers with more moxie and mojo than I have provided two-thumbs up for content, cohesion and communication on ready to apply concepts. 

The book guarantees five-figure-plus transformation or money back.  And, a million copies will provide hundreds of veterans and horses a safe place to heal.

Posted on January 3, 2016 .

Why I wrote Equity Value Enhancement ("EVE") December 21, 2015

Talk about stretch goals....  First, it was serving as a combat officer in the US Marines; then developing land in Costa Rica; then running for U.S. Senate; then foster care.....  My passion has always been and continues to be serving.

While most consider what I do (what's this worth?) is who I am, I live, eat and breathe value creation (so much more than financial engineering).  This usually means execute a strategy to align advisors' and owners' expectations and efforts.

Ultimately, this is to achieve owner success to significance.  So, while I advise and litigate on matters of equity value, I wrote the John Wiley & Sons "EVE" to share the wisdom of hundreds of advisors and owners over the past 25 years.

But about stretch goals and serving... Since I don't know my expiration date (our 5 kids do!), I try to live my bucket list on a daily basis.  My next effort is to take the proceeds from this book and fund a 501(c)3 that rescues horses and dogs that will be used for equine and canine therapy in conjunction with helping veterans suffering from combat Post Traumatic Stress Disorder ("PTSD").

This will be part of the offerings at TwoBearsRanch.org (will also host spiritual and business retreats as well as other ranch operations).  The balance is to raise capital for this ranch as a form of impact investing.  If you want to read an advance ("draft") of the first few EVE chapters, go to www.carlsheeler.com; or order the book at Amazon.com (Amazon Link to Equity Value Enhancement); or learn more about the ranch and/or book by contacting me direct.  Cheers.

Posted on January 3, 2016 .