Value Relativity. Investment in Your Business. Private Cost of Capital.

1. Creating Value in Your Business
Presented by
Rob Slee, CM&AA, MA, MBA
© 2015 Robert T. Slee. All Rights Reserved.

2. Building America One Business at a TimeCreating Value in a Business
 Value Relativity
• Think of a value for your business
• Who else agrees with this value?
• Without an active trading market, how are private
values determined?
• The reason you need to know the value leads to a
value world
• Every private company has dozens of correct values at
one point in time (because there are dozens of reasons
/ value worlds)
• Why? Not because I say so – but because Authorities
say it is so (perspectives matter in the private markets)
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Slee

3. Building America One Business at a TimeCreating Value in a Business
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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 the owner says it is worth
• Investor Value – what an investor says it is worth
• Collateral Value – what the bank says it is worth
• Incremental Business Value – returns greater than
investment
• 30 second rule…
Slee

4. Building America One Business at a TimeCreating Value in a Business
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 The Only Value That Matters
• Slee says that at least 80% of company owners are
NOT increasing the value of their firms
• How do you know if your daily decisions are increasing
the value of your firm?
• Incremental Business Value (IBV) is the answer:
IBV = Recast EBITDA – (Investment * Cost of Capital)
Slee

5. Building America One Business at a TimeCreating Value in a Business
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 Recast EBITDA as the Return
• Reported EBITDA is adjusted for owner discretionary
expenses and one-time expenses
• Why recast EBITDA?
• Let’s agree that: Accounting=Cost; Finance=Value
Slee

6. Building America One Business at a TimeCreating Value in a Business
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 Investment in Your Business
• Is “book value” meaningful as a metric for judging
investment in your business?
• What is Investment then?
Investment = comprises all expenditures in a project or
business that have a long-term impact. The concept of
Investment is much more expansive than accounting
terms such as book value. For example, Investment
incorporates spending on “nouns” – people, places and
things.
Slee

7. Building America One Business at a TimeCreating Value in a Business
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 Private Cost of Capital
• Every type of capital has a cost
• What are you demanding as a return on the Investment
in your business?
• Until now we didn’t have empirical evidence of private
cost of capital
• So Slee/Pepperdine teamed-up in 2009 to create the
Pepperdine Cost of Capital surveys
Slee

8. Building America One Business at a TimeCreating Value in a Business
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Slee

9. Building America One Business at a TimeCreating Value in a Business
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 Project Decision-Making IBV Example
• Jen wants to hire a salesperson (why?)
• The salesperson will cost $150,000 (all-in)
• Pro forma projections are that the salesperson will
generate $75,000 in EBITDA
• Jen looks at the PPCML and thinks a 25% return is
reasonable for her to expect
IBV = Recast EBITDA – (Investment * Cost of Capital)
IBV = $75,000 – ($150,000 * 25%)
= $37,500 (what does this mean?)
Slee

10. Building America One Business at a TimeCreating Value in a Business
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 Determining Overall IBV for a Company
• Recast EBITDA is $2.8 million for Jen’s company
• Investment is $4.6 million (BV is < $1 million)
• Cost of capital = 25%
IBV = Recast EBITDA – (Investment * Cost of Capital)
IBV = $2.8 million – ($4.6 million * 25%)
= $1.65 million
Slee