Creating Value in a Globalized World

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Creating Value in a Globalized World
Presentation by Rob Slee, CBA, MA, MBA Robertson
Foley, Investment Bankers, Charlotte rob_at_roberts
onfoley.com
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The Problem / Opportunity
Most business owners are not increasing the value
of their firms
What can be done to improve this?
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Lets Review What Is Being Taught
? There is one primary capital market in the
U.S. ? Corporate finance theory explains behavior
of the players ? Every business has one true
value ? Capital is efficiently allocated and
priced ? Going public is the primary goal of a
business owner But none of this is true!
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Upon Further Review
? Capital markets are segmented in the
U.S. ? Various finance theories explain behavior
of the players ? Every private business has
dozens of correct values at one time ? Private
capital is not efficiently allocated and
priced ? More companies will go private than
public in the foreseeable future A new belief
system developing?
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What are the Private Capital Markets?
? The venues where private capital is raised and
private equity interests are exchanged If
youre sitting here
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A Tale of Two Markets
Public Markets (Wall St.) Private Markets (Main St.)
Use of a C corporation Can be any type entity (S, LLC, etc)
Value is established by a market Value is established at a point in time
Ready access to public capital markets No access to public capital markets
Owners have limited liability Owners have unlimited liability
Owners are well diversified Owners have one primary asset
Professional management Owner management
Company has infinite life Typical company life of one generation
Liquid securities efficiently traded Illiquid securities inefficiently traded
Profit maximization as goal Personal wealth creation as goal
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Capital Markets An Overview
Sales (millions)
5 150
500 1,000
Small Lower
Middle Upper
Large Businesses M I d d l
e M a r k e t
Companies
5.4MM 300,000
2,000
2-3x 4-7x 8-9x 10-11x
gt12x
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Different Theories for Different Segments
Sales (millions)
5 150
500 1,000
Small Lower
Middle Upper
Large Businesses M I d d l
e M a r k e t
Companies
Small Company Markets Theory
Private Capital Markets Theory
Corporate Finance Theory
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Dickens Déjà Vu?
? Capitalism may be the most successful export
in US history ? Its the best of times for
companies with conceptual business models (how
you organize to meet your goals) ? Its the worst
of times for companies with provincial business
models ? 70 of private business owners are NOT
increasing the value of their firms
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Whats an Owner to Do?
I. Learn to think and act strategically II. Raise
his/her Private Finance IQ III. Play to win by
the New Rules of wealth creation
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I. The Strategy Thing
Every so often the rules of business change
Industrial Age
Information Age
Conceptual Age
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What Game Are You Playing?
The game of business
Information Age Conceptual Age Left
brain Left and right brain Tactical Strategic
MBAs wonks Designers and deliverers
Checkers Chess
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Who or What is Holding You Back?
? Most owners spend less than 10 of their time
on strategic thinking (strategy is what you do
to meet your goals) ? In the Conceptual Age,
operational effectiveness is the starting
point ? Whats the main constraint every business
faces? ? Whoever sits behind the owners desk!
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Tactical vs. Strategic Thinking
Tactical Strategic Sergeant
General Player Coach Operations
Business model Sales Marketing
Does all of this matter to creating wealth?
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II. Private Finance
? The study of how private companies make
investment and financing decisions ? Value
Relativity Value is relative to the reason for
an appraisal ? The Bizarre Bazaar Private
capital is allocated in a bazaar ? Transfer
Spectrum Business transfer comprises a
spectrum of alternatives ? You are lost until
you understand the integrated structure of
private finance (a story might help)
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On the Lighter Side

Investment Banker Man
The harmonic mean of the public control premiums
derives an implied minority discount that is
multiplicatively, not additively, applied to the
unadjusted
Slee3
Why its so difficult to value a business
appraisers opinion
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Value Relativity
? Einstein and his theory of relativity ? Slees
theory of value relativity ? The reason for an
appraisal leads to a value world ? Every private
company has dozens of correct values at one
point in time ? Why? Not because I say so but
because Authorities say it is so
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A Few Value Worlds
? Market Value what the open market says the
business is worth (Asset, Financial, and Synergy
Subworlds) ? Fair Market Value what the
IRS/Courts say it is worth ? Owner Value what
you say it is worth ? Investor Value what an
investor says it is worth ? Collateral Value
what the bank says it is worth ? Why is there
relativity? Without an active trading market,
perspective of the players matters
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The Bizarre Bazaar
Success in the private capital bazaar
requires (BTW, why a bazaar and not a
supermarket?) ? Understanding the structure and
rules of the bazaar ? Being prepared for
financial hand-to-hand combat ? Realizing that
capital providers constantly move their tents ?
Creating capital solutions one deal at a time
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Structure of the Bazaar
? Private capital owner motives include a
desire for few shareholders to stretch
equity to eliminate personal guarantees to
manage business not balance sheet ? Capital
is allocated based on the credit requirements of
the providers (credit box) ? Capital providers
have unique return expectations ? Return
expectations are all-in rates (not just stated
interest rates)
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On the Lighter Side

Investment Banker Man
Let me get this straight, the all-in cost to
factor my clients receivables is Prime 3
Slee3
Commercial truth-in-lending when Prime hits 30
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Private Capital Access Line
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Business Transfer
? Business transfer reflects all possible ways
or methods to transfer or exchange a private
business interest ? An owners transfer motive
selects a transfer channel (e.g., Employee
channel) ? Each channel contains numerous
transfer methods (e.g., ESOP or MBO) ?
Transfer methods select value worlds!
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Business Transfer Spectrum
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Owner Motives Matter
Possible values for PrivateCo Buy/Sell Asset
Market Value 2.4 MM MBO Investment Value
7.5 MM ESOP Fair Market Value 9.2
MM Recap Financial Market Value 12.0
MM Auction Synergy Market Value 16.6
MM IPO Public Value Ask Google Business Owners
Choose a Transfer Value!
Method
Value World
Value
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III. New Rules of Wealth Creation
1. Every person working in or for a business
must create wealth to remain
employed 2. Job security is a function of the
number of wealth- creating skill sets that are
possessed 3. A company can expand its returns via
arbitrage if its managers understand how to
exploit market opportunities.
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III. New Rules (cont)
4. Companies should adopt conceptual business
models to create wealth. 5. Owners need to raise
their Private Finance IQs to make better
investment and financing decisions (and thereby
create wealth).
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The Midas Touch
? Most owners know the game has changed, but
they dont know how to win going forward
? Midas Managers have figured it out ? Midas
Managers have always existed and have always
created wealth ? Lets review the essence of Midas
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Essence of Midas
Midas Managers are ? Control freaks in pursuit
of a goal ? Contrarians ? Strategists who
delegate ? Able to look just over the
horizon ? Capable of understanding and
exploiting the motives of others ? Driven to
create wealth
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The Wealth Matrix
Market Position
Income
Risk
Arbitrage Business Models Private Finance
M I D A S S T R A T E G I
E S
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Lets Play Some Wealth Creation Games
1. The Valuable View Game 2. The Consolidation
Math Game 3. The Create a Niche Conglomerate
Game 4. The Productize Your Business Game 5. The
Design and Deliver Game
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1. The Valuable View Game
Small
Middle
50 40 30 20 10 0
Expected Returns
Large
Debt Mezzanine
Equity
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1. How to Get Viewed on a Better Line

• 1. Simplify the business model
• 2. Develop a recurring revenue/income stream
• 3. Institutionalize the business (mgmt, systems,
  etc.)
• 4. Create transparency on all fronts
• 5. Rationalize the process chain
• End Result Better/cheaper access to capital
  plus a higher acquisition multiple

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2. Consolidation Math Game
Sales (millions)
5 150 500
1,000
Small Lower
Middle Upper
Large Businesses M I d d l
e M a r k e t
Companies
2-3x 4-7x 8-9x 10-11x
gt12x
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2. The Rules of this Game
? Identify your market segment ? You need a
platform company ? Determine which competitors
are not adding value ? Go after all of them at
once ? Use the Head-n-Shoulders approach ? The
toughest part is integrating the
operations ? Dont fall in love with the result
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3. Create a Niche Conglomerate
? Take what globalization will give you become
a niche-aholic ? Successful middle market firms
are amalgams of niches ? Hang your niches off an
intellectual capital tree ? Spend 50 of your
time developing the next niche ? Ideal company
15 MM in sales, comprised of 5-6 niches, EBITDA
of 4-5 MM
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3. Niche Building (Robs Intellectual Capital
Tree)
Seminars
Preach Write Create Engr.
Advise
Own Stuff
Books
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4. Productize Your Business Game
? Cimtec Automation is a Charlotte value-added
distributor of factory automation ? The managers
and I bought it from Unifi in 2002 ? Project
engineering equates to no value creation because
the market wants/values recurring revenue/income
streams ? We are currently productizing our
offerings ? This is the Head-n-Shoulders
approach again
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5. Design and Deliver Game
? The new global business model calls for
controlling rather than owning your process
chain (own only your intellectual
capital) ? This strategy works even in depressed
industries ? Take the Textiles industry for
example. We have clients with annual sales of
more than 50MM EBITDA of more than 10MM
fewer than 15 employees.
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5. Design and Deliver (Example)
Robertson Foleys Process Chain
The Old Chain
OWN EVERY STEP OF THE PROCESS (INCLUDING
EMPLOYEES/OTHER)
The New Chain
MARKET ENGINEER
OUTSOURCE DELIVER
The hardest part is letting go of what worked
10-20 years ago
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Whats Stopping You?
? Creating wealth is a choice ? Most owners seek
only a lifestyle not wealth ? The Conceptual
Age threatens to destroy many lifestyle
businesses ? Owners need to reconceptualize
themselves and their business models
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Where Do You Go from Here?
? Answer the following question - If we were
meeting 3 years from now, what would have to
happen for you to feel like youve been
successful? ? Write down the answers and post
them ? Choose strategies that will get you
there ? By all means, delegate the stuff you
hate, and enjoy meeting your goals!
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Après Wealth Creation
Once you create wealth, you need to realize
it