Equity Value Enhancement

A detailed look at risk identification and value creation in private equity investment

Equity Value Enhancement ("EVE"): Governance, Risk, Relationships & Knowledge ("GRRK") provides the information and tools practitioners and business owners need to work with the multitude of intangibles ("GRRK") in equity investment decisions. The author engages readers with an insightful and brief claim: "Values are more than numbers." He then provides support for just how important human capital is to the value creation paradox. He doesn't stop there because ideas without definitive actions don't promote transformation. He further challenges the reader with: "If you don't think outside of the box, you're doomed to live in the box."

A user-friendly manual chock full of vignettes, suggestions and pithy commentary EVE is a must read for owners, officers, boards and advisors to derive understanding of business value drivers. This book teaches the reader how to conduct more intangible asset due diligence as well as what decisions and behaviors impact value. With more effective methods of risk identification, measurement, management, and mitigation ("IMMM"), trusted advisors and owners can establish a "working on the business" strategy to prioritize issues impacting a company's intangible assets – assets which almost inevitably create the largest component of value in flourishing companies. This focus also serves to reduce risk while leveraging human capital and operational effectiveness. This book challenges users of value enhancement and valuation services to demand greater intellectual rigor to best serve owners/investors of the United States' economic engine—the midmarket company. Therefore, readers are challenged to look beyond the common metrics and numbers. They are admonished to rely less on formulaic approaches and on software that can generate spurious opinions. The reader is called to action by the author, a US Marine Combat Officer veteran, to lead the change: "You burn the boats if you want to be sure you succeed taking the island."

Trillions of dollars of private equity are changing hands as Baby Boomer owners and investors seek greater liquidity and legacies while investors seek higher returns from direct investment in private companies. This book provides risk and human capital guidance removing some of the guesswork on valuation and value creation.

• Provide better evidence of value & equity discounts
• Identify and quantify risk and provide tools to manage it
• Inform better business management and investment decisions
• Create a more comprehensive valuation for equity investments
• Roadmap and strategy for enhancement of going concern value

Governance, Risk and Compliance ("GRC") management are hot topics in today's economic environment. The familiar financial metrics may not be providing adequate indications of value creation – the core principle of most shareholder investment expectation. To identify risk and work with it effectively, practitioners need an in-depth understanding of the forces at play. Equity Value Enhancement is a detailed, insightful guide for making better equity decisions.

Finally, the author puts his passion front and center by offering the reader the opportunity to invest in the human capital this book addresses by encouraging support of military veteran's with combat PTSD so they may be productive citizens with the leadership and business skills provided by our country's "Greatest Generation."

Foreword xv

Preface xix

Acknowledgments xxxi

About the Author xxxiii

Author’s Vision and Challenge xxxvii

Chapter 1 Value ABCs 1

Capital and Risk 4

Understanding Assets 5

Plugging the Gap 7

Notes 8

Chapter 2 Focus on Trusted Advisors 9

The Path to Being the Best 16

Question Yourself 18

Taking It to the Next Level 19

Notes 22

Chapter 3 Focus on Business Owners 23

The Role of Advisors 27

The Cost of Bad Advice 28

The Value of Leveraged Knowledge 29

Engaging the Best 31

Practical Vetting Suggestions 32

Size and Scope Considerations 33

Setting Expectations 34

Note 44

Chapter 4 Risk in the Eye of the Beholder 45

Inexperienced Business Appraiser Lenses 47

CPA Lenses 48

Attorney Lenses 51

Investment Banker/Business Broker/Business Intermediary Lenses 52

Commercial Banker Lenses 54

Insurance Professional Lenses 55

Wealth Manager/Financial Advisor/ Fiduciary/Trust Officer Lenses 55

Research on Risk and Returns 59

Economist Lenses 60

MBA/PhD/CFA Lenses 61

Owner/Family Lenses 63

Family Business Advisor Lenses 70

Staff/Vendor Lenses 71

Client Lenses 75

Notes 80

Chapter 5 The Role of Governance 81

Governance 83

Focus on Culture 84

About Boards, Governance, and Strategy 85

Healthy Board Governance and Strategy Creates Value 87

Strategy and Equity Value 90

Family Harmony and Legacy as a Governance Driver 93

Board Strategic Direction and Accountability 94

Board Structure and Member Traits 95

Governance and Risk Management 97

Qualitative Value Measures 98

Taking Control 99

The Secret Sauce 101

Governance Measurements 104

Governance Takeaways 106

Notes 106

Chapter 6 The Role of Relationships 107

Client Relationships 112

Advisor Relationships 114

Commercial Bankers 116

Investment Bankers 116

Insurance Agents 118

Wealth Advisors 120

Board of Directors 121

The Bottom Line on “Free” Advisors 122

Accountants 122

Attorneys 126

Fractional CFO 127

Family Relationships 128

Shareholder Relationships 129

Vendor Relationships 129

Community/Legislative/Philanthropic Relationships 130

Chapter 7 The Role of Risk: Financial- and Legal-Oriented Risk 131

Commonly Missed Risks 137

Final Thoughts 172

Notes 174

Chapter 8 The Role of Risk: Operational-Related Risks 175

Chapter 9 The Role of Knowledge 241

A Matter of Culture 244

Healthy Knowledge 247

Be Transparent 248

Encourage Two-Way Communication 249

Knowledge and Human Capital 249

Knowledge Measures 252

Notes 253

Chapter 10 Valuation versus Value Creation (GRRK) 255

Software and Rules of Thumb 258

A Personal Aside 260

Collaboration, Cohesion, and Transformation 261

Notes 262

Chapter 11 Putting It All Together—Four Vignettes 263

Vignette One: What the 2009 Financial Crisis Can Teach Us (It’s about Relationships) 265

Vignette Two: The Trees-and-Forest Syndrome 272

Vignette Three: The Path Not Taken 275

Vignette Four: Putting It All Together (Strategy, Human Capital and Finance) 284

Recommended Reading 313

Index 317

CARL L. SHEELER, PHD, ASA, is the managing director and global group leader of family office and business strategies at Berkeley Research Group, LLC—a 900+ staff global business litigation and advisory services firm. He is also the founder of Business Valuations, Ltd./Allison Appraisals & Assessments, Inc. and co-founder of Privatus CI³O Services, LLC. He has performed more than 1,200 high-profile litigation, valuation, and restructuring engagements from midmarket to national companies. He has testified more than 170 times on matters ranging from IRS taxpayer to shareholder disputes and assisted hundreds of clients on the measurement, creation, management, and defense of more than $50 billion in values.

Carl is also a Manager of the Two Bears Ranch, LLC, formed to receive the proceeds from the sale of this book which will be used to serve combat PTSD veterans and at-risk horses and dogs. They will be healed through equine and canine therapy. Donations, grants, and ranch operation revenues will also subsidize this cause. If interested, contact Carl at his website at www.carlsheeler.com or www.twobearsranch.com.

The author can't turn lead into gold or guarantee unicorns for every business; however, he answers these questions: Why are affluent entrepreneurs able to get richer through concentrated risk? How do entrepreneurs ensure no money is left on the table? How do advisors assist owners weighing gratification versus growth options? And how do advisors optimize their relationships with business owners and each other? Equity Value Enhancement fills a critical knowledge gap for professional advisors and multigenerational entrepreneurial families who know there's more to a company than revenues and profits.

There's no better time for this practical guide than now—when a single perspective cannot adequately create, sustain, and enhance concentrated wealth. Based on more than a thousand engagements with mid-market to small-cap public companies, the author's hard-earned wisdom demonstrates simple wealth preservation strategies are often losing ones. Only through governance, relationships, risks, and knowledge can one become a "strategic-value architect" who measures, manages, and maximizes the intangible assets of a company while leveraging and aligning human and financial capital.

When you read Equity Value Enhancement, you will differentiate between valuation and value creation skillsets. You will understand how to identify the most common risks impacting price multiples and access expert insight into:

• How operating within a purposeful and collaborative framework of relationships and connections creates professional value beyond technical know-how and fee-for-service mindsets
• The business appraiser—insider tips for spotting a good one and the pitfalls of overlooking the importance of this key player
• The role strategy and culture plays in governance and a proven approach to measuring, and mastery of governance's influence on value
• The healthy ways key advisors and stakeholders can evolve into champions and stewards of value creation
• The top risks (and opportunities) that are hard to measure but are greatly influenced by human and financial capital

In addition to the illustrative examples in every chapter, the book has four eye-opening vignettes that connect the dots to reveal how the covered con- cepts come together and play out in the real world.

Equity Value Enhancement is the must-have-at-your-fingertips reference guide for ensuring advisors and their wealthy clients share a vision and are able to make a measurable contribution to the family's success and significance from liquidity to legacy.

The author can't turn lead into gold or guarantee unicorns for every business; however, he answers these questions: Why are affluent entrepreneurs able to get richer through concentrated risk? How do entrepreneurs ensure no money is left on the table? How do advisors assist owners weighing gratification versus growth options? And how do advisors optimize their relationships with business owners and each other? Equity Value Enhancement fills a critical knowledge gap for professional advisors and multigenerational entrepreneurial families who know there's more to a company than revenues and profits.

There's no better time for this practical guide than now—when a single perspective cannot adequately create, sustain, and enhance concentrated wealth. Based on more than a thousand engagements with mid-market to small-cap public companies, the author's hard-earned wisdom demonstrates simple wealth preservation strategies are often losing ones. Only through governance, relationships, risks, and knowledge can one become a "strategic-value architect" who measures, manages, and maximizes the intangible assets of a company while leveraging and aligning human and financial capital.

When you read Equity Value Enhancement, you will differentiate between valuation and value creation skillsets. You will understand how to identify the most common risks impacting price multiples and access expert insight into:

• How operating within a purposeful and collaborative framework of relationships and connections creates professional value beyond technical know-how and fee-for-service mindsets
• The business appraiser—insider tips for spotting a good one and the pitfalls of overlooking the importance of this key player
• The role strategy and culture plays in governance and a proven approach to measuring, and mastery of governance's influence on value
• The healthy ways key advisors and stakeholders can evolve into champions and stewards of value creation
• The top risks (and opportunities) that are hard to measure but are greatly influenced by human and financial capital

In addition to the illustrative examples in every chapter, the book has four eye-opening vignettes that connect the dots to reveal how the covered concepts come together and play out in the real world.

Equity Value Enhancement is the must-have-at-your-fingertips reference guide for ensuring advisors and their wealthy clients share a vision and are able to make a measurable contribution to the family's success and significance from liquidity to legacy.