CREATING ● VALUE ● IN ● A ● GLOBALIZED ● WORLD 1 Creating Value in a Globalized World Presentation by Rob Slee, CBA, MA, MBA Robertson & Foley, Investment

CREATING ● VALUE ● IN ● A ● GLOBALIZED ● WORLD 1

Creating Value in a Globalized World

Presentation by Rob Slee, CBA, MA, MBA

Robertson & Foley, Investment Bankers, Charlotte

[email protected]


The Problem / Opportunity

Most business owners are not increasing the value of their firms

What can be done to improve this?


Let’s 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!


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?


What are the Private Capital Markets?

● The venues where private capital is raised and private equity interests are exchanged

If you’re sitting here…


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


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

2-3x 4-7x 8-9x 10-11x >12x

5.4MM 300,000 2,000


Different Theories for Different Segments

Sales($millions)

5 150 500 1,000



Small Company Markets Theory

Private Capital Markets TheoryCorporate Finance Theory


Dickens Déjà Vu?

● Capitalism may be the most successful export in US history

● It’s the best of times for companies with conceptual business models (how you organize to meet your goals)

● It’s the worst of times for companies with provincial business models

● 70% of private business owners are NOT increasing the value of their firms


What’s 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


I. The Strategy Thing

Every so often the rules of business change

Information Age…

Industrial Age…

Conceptual Age


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


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

● What’s the main constraint every business faces?

● Whoever sits behind the owner’s desk!


Tactical vs. Strategic Thinking

Does all of this matter to creating wealth?

Tactical Strategic

Sergeant General

Player Coach

Operations Business model

Sales Marketing


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)


On the Lighter Side

Why it’s so difficult to value a business appraiser’s opinion

Slee3

The harmonic mean of the public control premiums derives an implied minority discount that is multiplicatively, not additively, applied to the unadjusted …

Investment Banker Man


Value Relativity

● Einstein and his theory of relativity

● Slee’s 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


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


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


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)


On the Lighter Side

Commercial truth-in-lending – when Prime hits 30%

Slee3

Let me get this straight, the all-in cost to factor my client’s receivables is Prime +3%

Investment Banker Man


Private Capital Access Line

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30

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Capital Access Points

Expecte

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Business Transfer

● Business transfer reflects all possible ways or methods to transfer or exchange a private business interest

● An owner’s 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!


Employees Family Co-Owners Outside

[Retire] Outside [Continue] Public

Charitable Trusts

T R A N S F E R M O T I V E S

T R A N S F E R M E T H O D S

ESOPs Management

Buyouts/Ins Phantom Stock Stock Appre- ciation Rights

Charitable Remainder

Trusts Charitable

Lead Trusts

Outright Gifts SCINs Annuities GRATs FLPs IDGTs

Negotiated One-Step Private Auctions Two-Step Private

Auctions

Consolidate Roll-ups Buy and Build Recapitali- zations

Initial Public Offerings

Direct Public Offerings

Reverse Mergers

Going Private

INTERNAL TRANSFERS

EXTERNAL TRANSFERS

Buy/Sell Russian

Roulette Dutch

Auction Right of

First Refusal

T R A N S F E R C H A N N E L S

Business Transfer Spectrum


Owner Motives Matter

Method Value World Value

Possible values for PrivateCo:

Buy/Sell Asset Market Value $ 2.4 MMMBO Investment Value $ 7.5 MMESOP Fair Market Value $ 9.2 MMRecap Financial Market Value $12.0 MMAuction Synergy Market Value $16.6 MMIPO Public Value Ask Google

Business Owners Choose a Transfer Value!


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.


III. New Rules (cont)

4. Companies should adopt conceptual business models to create wealth.

5. Owners need to raise their Private Finance IQ’s to make better investment and financing decisions (and thereby create wealth).


The Midas Touch

● Most owners know the game has changed, but

they don’t know how to win going forward

● Midas Managers have figured it out

● Midas Managers have always existed and have always created wealth

● Let’s review the essence of Midas


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


The Wealth Matrix

Arbitrage

Business Models

Private Finance

Income Risk MarketPosition

M I D A S

S T R A T E G I E S


Let’s 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


1. The Valuable View Game

50%

40%

30%

20%

10%

0%

Exp

ecte

d R

etu

rns

SmallMiddle

Large

Debt Mezzanine Equity


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


2. Consolidation Math Game

Sales($millions)

5 150 500 1,000

2-3x 4-7x 8-9x 10-11x >12x




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

● Don’t fall in love with the result


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


3. Niche Building (Rob’s Intellectual Capital Tree)

Preach

Write

Create

Engr.

Seminars

BooksOwn Stuff

Advise


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


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.


5. Design and Deliver (Example)

Robertson & Foley’s 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


What’s 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


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 you’ve 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!


Après Wealth Creation

Once you create wealth, you need to realize it…

Documents

CREATING ● VALUE ● IN ● A ● GLOBALIZED ● WORLD 1 Creating Value in a Globalized World Presentation by Rob Slee, CBA, MA, MBA Robertson & Foley, Investment