1 00:00:05,970 --> 00:00:06,930 Welcome back to Count Me In, 2 00:00:06,930 --> 00:00:11,010 IMA's podcast about all things affecting the accounting and finance world. 3 00:00:11,670 --> 00:00:15,150 This is your host Mitch Roshong and I would like to say thank you for coming 4 00:00:15,151 --> 00:00:17,760 back and listening to another episode of our series. 5 00:00:18,750 --> 00:00:23,610 The guest speaker for episode 145 here today is Claire Chandler an 6 00:00:23,611 --> 00:00:26,400 acquisition, integration, and onboarding specialist. 7 00:00:27,300 --> 00:00:31,260 Claire is a corporate survivor who draws upon almost 30 years of business 8 00:00:31,320 --> 00:00:33,510 leadership and consulting experience. 9 00:00:34,380 --> 00:00:39,120 One of her specialties is business value creation. In this conversation, 10 00:00:39,360 --> 00:00:42,750 you will hear her discuss what finance and accounting quite often get wrong when 11 00:00:42,751 --> 00:00:44,250 calculating business value. 12 00:00:45,000 --> 00:00:48,960 Keep listening as you will now hear from Claire Chandler with Adam Larson. 13 00:00:55,230 --> 00:00:56,520 So Claire, according to stockanalysis.com, 14 00:00:58,081 --> 00:01:03,030 I was reading that there have been over around 703 IPOs in the US stock 15 00:01:03,120 --> 00:01:08,010 market in 2021 as of around mid August, which is when we're recording this, 16 00:01:08,011 --> 00:01:12,570 which is 331% more than the same time in 2020. 17 00:01:12,780 --> 00:01:13,770 So needless to say, 18 00:01:13,920 --> 00:01:17,400 there's been a lot of business valuation happening as companies seek to grow and 19 00:01:17,401 --> 00:01:19,800 expand. So as we start off our conversation, 20 00:01:19,950 --> 00:01:22,320 can we talk about what drives the value of business? 21 00:01:23,340 --> 00:01:26,100 Yes, please. Yeah. 22 00:01:26,101 --> 00:01:29,190 What a great question to open up with, right. So, you know, 23 00:01:29,191 --> 00:01:32,940 back in the day we lived in an industrial economy, 24 00:01:32,941 --> 00:01:37,320 I think a lot of people make the mistake of thinking we are still there. 25 00:01:37,321 --> 00:01:41,730 and back when we were more industrial close to a hundred 26 00:01:41,731 --> 00:01:44,790 percent, about 95% of the value of a business, 27 00:01:44,791 --> 00:01:48,030 any business was driven by tangible assets, right? 28 00:01:48,031 --> 00:01:50,940 So things like a company's technology, 29 00:01:50,941 --> 00:01:53,580 the products that it made and sold, 30 00:01:53,880 --> 00:01:57,330 their operations and of course their financial capital, 31 00:01:57,331 --> 00:02:00,210 but we don't live in an industrial economy anymore. 32 00:02:00,211 --> 00:02:04,110 We actually live in an intellectual economy. 33 00:02:04,111 --> 00:02:07,860 That economy is dependent primarily on the output of a human mind. 34 00:02:07,861 --> 00:02:12,270 And I know that sounds bizarre when I say it out loud, but think about it. 35 00:02:12,271 --> 00:02:17,100 We're really driven by intangible assets companies, brand its services, 36 00:02:17,101 --> 00:02:20,010 more so than its products, the intellectual property, 37 00:02:20,730 --> 00:02:25,110 that the knowledge in the heads of the human capital, right? 38 00:02:25,111 --> 00:02:28,080 And so with this shift that has happened gradually, 39 00:02:28,081 --> 00:02:32,850 but we are fully ensconced in an intellectual economy. 40 00:02:32,880 --> 00:02:37,200 That shift also, changed what drives business value. 41 00:02:37,410 --> 00:02:41,310 So before it was almost entirely driven by tangible assets today, 42 00:02:41,311 --> 00:02:45,990 it's well over 72% driven by the intangibles. 43 00:02:45,991 --> 00:02:48,690 And we're seeing this across every industry - in some industries, 44 00:02:48,691 --> 00:02:51,900 if you look at say tech and pharma, 45 00:02:51,901 --> 00:02:56,790 they're close to a hundred percent driven by intangible 46 00:02:56,791 --> 00:03:00,250 assets, right. The products of the human mind. 47 00:03:00,370 --> 00:03:04,000 and so it's really critical that businesses pay attention to that. 48 00:03:04,480 --> 00:03:05,650 And then on top of that, 49 00:03:05,710 --> 00:03:08,980 you not only are you having to worry about the numbers and the financials, 50 00:03:09,400 --> 00:03:10,720 you have to start worrying about, 51 00:03:11,020 --> 00:03:15,850 things like ESG and sustainability are becoming more and more essential that you 52 00:03:15,851 --> 00:03:18,190 have to report, not only the mind, but also how, 53 00:03:18,191 --> 00:03:20,080 how is my business affecting the environment? 54 00:03:20,820 --> 00:03:22,390 Yeah, and it's, and it's interesting to that point, 55 00:03:22,391 --> 00:03:24,690 the markets have shifted in that way as well, right? The SEC 56 00:03:26,921 --> 00:03:29,080 has become more stringent and, 57 00:03:29,110 --> 00:03:32,110 has raised its expectations on what companies do, 58 00:03:32,470 --> 00:03:34,510 not only in the sustainability space, 59 00:03:34,750 --> 00:03:39,250 but also in terms of how people are treating and nurturing 60 00:03:39,640 --> 00:03:42,730 the human capital. So the markets have shifted, 61 00:03:42,731 --> 00:03:45,360 the economy obviously has shifted and, you know, the, 62 00:03:45,361 --> 00:03:49,810 the more successful businesses have embraced this and sort of incorporated that 63 00:03:49,811 --> 00:03:51,010 into their business strategy. 64 00:03:51,580 --> 00:03:55,960 So as we're thinking about businesses and, getting investors and growing IPOs, 65 00:03:55,961 --> 00:04:00,250 the other thing I was reading, I saw an article on Fortune the other day, 66 00:04:00,430 --> 00:04:04,060 it was saying that there's been over $2 billion of mergers and acquisitions 67 00:04:04,061 --> 00:04:07,210 activity in just 2021. I think that was through July, 68 00:04:07,240 --> 00:04:10,210 like the beginning of July. We're now like to mid August, you know, 69 00:04:10,211 --> 00:04:13,300 how can investors reduce the risk of investing in the wrong company, 70 00:04:13,301 --> 00:04:16,450 especially with so many different factors that we were just talking about. 71 00:04:17,200 --> 00:04:19,180 Yeah, it's, it's a huge question. Obviously, 72 00:04:19,181 --> 00:04:23,590 the bottom line is investors want to make their money back, in multiples, right? 73 00:04:23,650 --> 00:04:28,240 And so the way that to reduce the risks starts with their value creation 74 00:04:28,241 --> 00:04:29,320 plan hypothesis. 75 00:04:29,440 --> 00:04:34,300 They need to be crystal clear on their end 76 00:04:34,301 --> 00:04:35,140 goal, right? 77 00:04:35,170 --> 00:04:39,940 The clearer they are on what they want to get out of that portfolio company on 78 00:04:39,941 --> 00:04:43,660 the back end, whether it's a holding period of three years, five years, 79 00:04:44,050 --> 00:04:47,380 you know, even longer the clearer they are on that going in, 80 00:04:47,381 --> 00:04:52,000 the easier it is on the front end to make sure that the company they're 81 00:04:52,001 --> 00:04:55,960 evaluating actually has the capacity and the capability to deliver that return 82 00:04:55,961 --> 00:04:59,350 for them. Because obviously that is the goal, whatever form it takes, 83 00:04:59,351 --> 00:05:03,220 that investor wants to get the most bang for their buck. 84 00:05:03,221 --> 00:05:04,330 So they've got to be really, 85 00:05:04,331 --> 00:05:08,500 really clear on the hypothesis going in on what they expect to get out of their 86 00:05:08,501 --> 00:05:09,334 VCP. 87 00:05:09,790 --> 00:05:12,770 So then on the other side, what about what should companies be doing to, 88 00:05:12,771 --> 00:05:14,380 to attract the right funding? You know, 89 00:05:14,381 --> 00:05:16,300 cause you got to think about their side too. 90 00:05:16,960 --> 00:05:19,990 Yeah, absolutely. And it's, and it's all about the right funding, right? 91 00:05:19,991 --> 00:05:23,110 To your point. And it's a similar process for companies on that, 92 00:05:23,111 --> 00:05:25,900 on that side that are looking to grow through the backing of the right 93 00:05:25,901 --> 00:05:30,760 investors. So they need to be really clear on their end goal as well. 94 00:05:30,761 --> 00:05:34,810 And it's probably not as far out for them, it may not be five or 10 years. 95 00:05:34,811 --> 00:05:37,540 It may be, you know, 12 months to 36 months, 96 00:05:37,541 --> 00:05:42,130 but they need to deeply understand where they want to take their business 97 00:05:42,131 --> 00:05:47,080 and how ready they are to grow in that direction with, or without funding. 98 00:05:47,081 --> 00:05:51,280 Right. So, and I say that to really make this point, 99 00:05:51,880 --> 00:05:55,450 a lot of startups make this fatal mistake of believing that money is going to 100 00:05:55,451 --> 00:05:58,340 solve everything right. We get to the next level. 101 00:05:58,370 --> 00:06:02,690 If only we have the financial capital and that's totally false, 102 00:06:03,380 --> 00:06:07,130 they really need to evaluate their capacity and capability just like the 103 00:06:07,131 --> 00:06:08,510 investor is going to do. 104 00:06:08,960 --> 00:06:12,320 Before that investor comes in and does that for them and finds that they're not 105 00:06:12,321 --> 00:06:16,460 really ready to grow and scale. So it's not just about getting investment. 106 00:06:16,820 --> 00:06:19,490 It's about understanding why you need that investment. 107 00:06:19,530 --> 00:06:22,820 Are you ready to take that investment and who is the right source of that 108 00:06:22,821 --> 00:06:23,654 funding? 109 00:06:23,900 --> 00:06:25,730 Yeah. Because somebody could come to your startup and say, 110 00:06:25,731 --> 00:06:28,700 we're going to give you $2 billion, but if you're not ready to grow, 111 00:06:28,910 --> 00:06:32,090 then that $2 billion would just kind of go to waste. 112 00:06:32,850 --> 00:06:34,400 It's going to be a wasted bet on, 113 00:06:34,460 --> 00:06:38,210 and both sides are going to be complete failures in that regard, right. 114 00:06:38,211 --> 00:06:41,600 Especially if you're talking about an investment to the tune of, you know, 115 00:06:41,601 --> 00:06:45,650 a billion dollars or more an investor is not going to do that on a wish and a 116 00:06:45,651 --> 00:06:48,200 prayer, they really do need to be very, 117 00:06:48,201 --> 00:06:52,400 very thorough in vetting the company they're about to put their money behind. 118 00:06:52,460 --> 00:06:57,080 And the company itself has to be really self-aware and disciplined 119 00:06:57,350 --> 00:06:59,210 before they take on that level of funding. 120 00:07:00,260 --> 00:07:05,150 So I can imagine that there's going to be mergers and acquisitions that 121 00:07:05,300 --> 00:07:08,510 aren't successful. We can, you can read about the famous ones when, 122 00:07:08,870 --> 00:07:11,180 I forget which company bought AOL, you know, 123 00:07:11,181 --> 00:07:14,060 no one really knows what AOL is anymore. You know, stuff like that. 124 00:07:14,061 --> 00:07:17,540 Why do most mergers and acquisitions fail to create value? 125 00:07:18,590 --> 00:07:22,910 Hey, so, you know, in my, in my defense, I still have an AOL email account. it, 126 00:07:22,940 --> 00:07:26,450 it's my it's the oldest one I have. And I'm a little bit nostalgic, I guess. 127 00:07:26,451 --> 00:07:30,290 So it's, I still use it for personal email, but I digress. Yeah. So 128 00:07:32,270 --> 00:07:34,880 Bain and company, it's one of the big, you know, research, 129 00:07:34,881 --> 00:07:37,430 houses and they do a lot of work in this space. 130 00:07:37,460 --> 00:07:42,260 they put out a global private equity report earlier this year that found that 131 00:07:42,261 --> 00:07:46,490 58% of MNAs fail to create value. 132 00:07:46,970 --> 00:07:50,660 And one of the main reasons that they fail is because they over-index on the 133 00:07:50,661 --> 00:07:53,030 tangible side, right? They over-index, 134 00:07:53,031 --> 00:07:55,550 they over-focus on the due diligence side, 135 00:07:55,551 --> 00:08:00,080 the integration side and the management side post-close on those tangible assets 136 00:08:00,081 --> 00:08:01,010 that we talked about. 137 00:08:01,550 --> 00:08:06,320 And what's interesting is that same study by Bain found that the number one 138 00:08:06,321 --> 00:08:11,210 reason deals fail is the quality of the human capital within that portfolio 139 00:08:11,211 --> 00:08:14,180 company, specifically the top management team. 140 00:08:14,840 --> 00:08:18,860 And so what the sort of the good news about that and I mean, 141 00:08:18,920 --> 00:08:21,380 an eternal optimist. So I always look for the silver lining. 142 00:08:21,381 --> 00:08:25,640 The good news on that side is that the quality of that top management team, 143 00:08:25,880 --> 00:08:26,451 which again, 144 00:08:26,451 --> 00:08:30,200 is this combination of their capacity to get to the next level and their 145 00:08:30,201 --> 00:08:32,120 capability to, you know, 146 00:08:32,121 --> 00:08:35,300 to put the horsepower behind it in terms of depth of talent, et cetera. 147 00:08:35,900 --> 00:08:38,300 It's also the number one reason deals succeed. 148 00:08:38,720 --> 00:08:41,690 So if you look at that in black and white, 149 00:08:41,750 --> 00:08:46,580 if that is the number one variable or wildcard is your human capital on 150 00:08:46,581 --> 00:08:48,980 both the failure side, the success side, 151 00:08:49,130 --> 00:08:54,050 why wouldn't you spend way more time and attention and effort on evaluating 152 00:08:54,051 --> 00:08:54,884 that. 153 00:08:55,560 --> 00:08:57,690 That makes a lot of sense. 154 00:08:57,691 --> 00:09:02,220 Do you think that there's an element of the virtual capital? 155 00:09:02,221 --> 00:09:06,240 Like the things you can't see, the intangibles, besides the human capital, 156 00:09:06,241 --> 00:09:07,710 that could be an element of that, 157 00:09:07,711 --> 00:09:09,930 that it's hard to measure that we can't really see. 158 00:09:10,650 --> 00:09:13,110 Yeah. You know, that's, that's always the biggest, 159 00:09:13,230 --> 00:09:17,010 I think mental stumbling block when I talk to, you know, 160 00:09:17,011 --> 00:09:19,680 folks in the investment community and I say, you really need to spend more, 161 00:09:19,681 --> 00:09:23,160 more time and attention measuring and assessing those intangibles. 162 00:09:23,161 --> 00:09:27,390 And invariably, they come back to me and they say, okay, that's great. 163 00:09:27,391 --> 00:09:31,560 I get that. That's the biggest wildcard I get what Bane is telling us, 164 00:09:31,561 --> 00:09:34,950 I get that just from past experience, you know, the, 165 00:09:35,160 --> 00:09:38,160 the human behavior, performance capability, capacity, 166 00:09:38,161 --> 00:09:40,800 all those things are the biggest wild card. And then the products of that, 167 00:09:40,801 --> 00:09:43,740 right? The brand, the ability to innovate, 168 00:09:43,741 --> 00:09:47,670 the ability to solve problems, all of those things. 169 00:09:48,060 --> 00:09:50,580 but then they follow that up with saying, but they're humans, 170 00:09:50,730 --> 00:09:53,910 we can't measure that they're unpredictable, they're total wildcards. 171 00:09:54,660 --> 00:09:58,260 And the answer in fact is you can measure that there are ways. 172 00:09:58,591 --> 00:10:01,530 And in the work that I do, there are, there are tools, 173 00:10:01,650 --> 00:10:06,480 there are scientifically validated tools that will measure and assess 174 00:10:06,810 --> 00:10:10,380 these things that we're talking about, the capacity, the capability, 175 00:10:10,590 --> 00:10:13,800 the mindset, the coachability often, 176 00:10:13,801 --> 00:10:17,610 that's a big stumbling block for an investor coming into a company and saying, 177 00:10:17,640 --> 00:10:22,080 you got from point A to point B. We want to see if you can get to point C. 178 00:10:22,320 --> 00:10:25,620 There are ways to validate before you put your money behind that business. 179 00:10:25,830 --> 00:10:30,360 Whether that top management team can actually receive that 180 00:10:30,361 --> 00:10:35,010 coaching that advice and change the way that they do things from 181 00:10:35,011 --> 00:10:39,330 management by chaos to a more structured way to get to the next level. 182 00:10:39,930 --> 00:10:44,820 So as I'm kind of thinking about how this connects to our audience, you know, 183 00:10:44,850 --> 00:10:46,500 the accounting and finance teams, 184 00:10:46,950 --> 00:10:49,740 what can they do right when calculating business value, 185 00:10:49,920 --> 00:10:53,520 because I'm sure that they'll be integral in calculating the business value when 186 00:10:53,521 --> 00:10:55,680 it comes to ventures or IPO's and all that stuff. 187 00:10:56,550 --> 00:10:58,740 Yeah. They are absolutely integral. 188 00:10:58,741 --> 00:11:03,270 And I honestly think our friends in finance and accounting have the best 189 00:11:03,271 --> 00:11:05,850 opportunity to turn the tide right. To 190 00:11:08,371 --> 00:11:12,630 sort of tip the scales away from over indexing 191 00:11:12,631 --> 00:11:17,580 on tangible assets and really incorporate into their process, 192 00:11:17,581 --> 00:11:21,330 more of an evaluation and valuation of the, of the intangibles. So, you know, 193 00:11:21,331 --> 00:11:25,740 how do you do that? Well, instead of just focusing on, 194 00:11:25,741 --> 00:11:30,240 you know, quantifying head count, quantifying customers, taking a look at, 195 00:11:30,241 --> 00:11:33,360 you know, have they gotten into any legal trouble in the past, you know, 196 00:11:33,361 --> 00:11:37,860 counting up all of the widgets and the tangible assets that make up 197 00:11:38,220 --> 00:11:41,580 a company, really upskilling, 198 00:11:41,581 --> 00:11:46,410 starting a due diligence that, you know, their process for evaluating, 199 00:11:46,411 --> 00:11:47,460 the intangible side, 200 00:11:47,461 --> 00:11:51,480 which we already know across every industry drives the majority of the business 201 00:11:51,810 --> 00:11:52,380 value. 202 00:11:52,380 --> 00:11:57,100 So they need to find ways to evaluate that capacity and capability specifically 203 00:11:57,101 --> 00:11:58,990 at the top management level. 204 00:11:59,020 --> 00:12:02,410 but they also need to evaluate the depth of the talent behind them. 205 00:12:02,411 --> 00:12:04,870 And if they do that, if they find ways to do that, 206 00:12:04,871 --> 00:12:08,980 or if they find people like me - we are out there - to help them do that. 207 00:12:09,580 --> 00:12:14,260 They're going to be able to help their companies invest in the right businesses 208 00:12:14,320 --> 00:12:17,950 with far less risk and far more confidence in success. 209 00:12:19,060 --> 00:12:22,870 Are there specific things that they should avoid when doing that valuation? 210 00:12:22,871 --> 00:12:24,700 I know you gave some great pointers there, 211 00:12:24,701 --> 00:12:27,250 but what are some steps that they should really avoid or some, 212 00:12:27,340 --> 00:12:29,050 some red flags they should look out for? 213 00:12:29,950 --> 00:12:33,310 Yeah. so it's interesting that you say red flags. So I, 214 00:12:33,340 --> 00:12:36,730 in the work that I've done, in some of the valuations that I've done 215 00:12:38,800 --> 00:12:42,190 for investors, and even on the, on the, on the company side, I have a, 216 00:12:42,191 --> 00:12:46,990 sort of a framework that I use and I put together a checklist that I can give 217 00:12:46,991 --> 00:12:50,020 your audience, the link to, they can go out and in, in grab it, 218 00:12:50,320 --> 00:12:54,520 but it's a great way for companies and investors to, 219 00:12:54,550 --> 00:12:57,750 sort of do a self-check on it. 220 00:12:57,751 --> 00:13:01,840 It basically comprises the 11 dimensions that drive performance and 221 00:13:01,841 --> 00:13:05,140 profitability. So the checklist kind of takes you through each of those 11, 222 00:13:05,141 --> 00:13:07,990 and you can sort of self-assess on the company side, 223 00:13:08,140 --> 00:13:11,860 or as the investor looking into a prospective company, you know, 224 00:13:11,861 --> 00:13:13,660 just sort of rate those things, 225 00:13:13,661 --> 00:13:17,230 following the checklist and what it will yield for you is it will help you 226 00:13:17,231 --> 00:13:20,380 identify what are my top three profit levers, right? 227 00:13:20,861 --> 00:13:25,600 So what are the three dimensions that we have that we have in spades that are 228 00:13:25,601 --> 00:13:28,060 competitive advantages for us, that if we put the right horsepower, 229 00:13:28,061 --> 00:13:32,710 the right attention behind it, they can really drive the business forward. 230 00:13:32,920 --> 00:13:33,251 And conversely, 231 00:13:33,251 --> 00:13:38,080 it will help you uncover what are the top three risk flags, 232 00:13:38,081 --> 00:13:43,000 red flags, potential derailers that could sink your business. 233 00:13:43,001 --> 00:13:47,710 And so investors have used that checklist, yes, for the profit levers, 234 00:13:47,711 --> 00:13:49,390 but more specifically to say, 235 00:13:49,391 --> 00:13:54,130 are there any answers in here that are deal-breakers that if 236 00:13:54,131 --> 00:13:55,090 we knew this upfront, 237 00:13:55,091 --> 00:13:58,960 if we paid some attention to this and follow this checklist would make us walk 238 00:13:59,440 --> 00:14:02,020 away. So it's really, really important from, from both sides. 239 00:14:02,021 --> 00:14:05,320 One to help you press your advantage and play to your strengths, 240 00:14:05,500 --> 00:14:09,970 and also to make sure that you go in with eyes wide open and verify 241 00:14:10,540 --> 00:14:11,373 before you buy. 242 00:14:12,040 --> 00:14:12,340 Yeah. 243 00:14:12,340 --> 00:14:16,990 Verify before you buy is I think it's something that we all should keep in mind 244 00:14:16,991 --> 00:14:18,640 no matter what you're doing for sure. 245 00:14:19,330 --> 00:14:20,230 Yeah. Yeah. 246 00:14:20,980 --> 00:14:21,820 Well, Claire, 247 00:14:21,821 --> 00:14:25,540 I really appreciate you coming on our podcast today for sharing your insight. 248 00:14:25,570 --> 00:14:29,050 I know that our audience will be really be greatly receptive to it. 249 00:14:30,100 --> 00:14:31,780 Well, it's my absolute pleasure. 250 00:14:31,870 --> 00:14:34,420 if anyone in your audience does want to grab that checklist, 251 00:14:34,421 --> 00:14:37,330 they can go to my website. It's talentboost.net/checklist 252 00:14:41,321 --> 00:14:43,600 is the fastest way to get to that checklist. Otherwise, 253 00:14:43,601 --> 00:14:45,430 if you just go to talentboost.net, 254 00:14:45,491 --> 00:14:48,850 there's a button at the top click on checklist. 255 00:14:48,851 --> 00:14:50,500 and as you kind of go through the checklist, 256 00:14:50,501 --> 00:14:53,810 if you have any other questions you want to reach out and talk specifically 257 00:14:53,811 --> 00:14:55,670 about where you are in your business, 258 00:14:55,700 --> 00:14:59,180 has somebody like me can help you get ready for your next level. 259 00:14:59,750 --> 00:15:03,350 Go to the top of that same page. There's a big button that says, book a call, 260 00:15:03,500 --> 00:15:05,810 click that button, pick a time and let's chat. 261 00:15:07,970 --> 00:15:10,700 This has been Count Me In, IMA's podcast, 262 00:15:10,730 --> 00:15:13,970 providing you with the latest perspectives of thought leaders from the 263 00:15:13,971 --> 00:15:16,760 accounting and finance profession. If you like what you heard, 264 00:15:16,820 --> 00:15:19,820 and you'd like to be counted in for more relevant accounting and finance 265 00:15:19,821 --> 00:15:20,630 education, 266 00:15:20,630 --> 00:15:24,860 visit IMA's website at www.imanet.org.