Ep. 145: Claire Chandler - Calculating Business Value
Claire Chandler, President and Founder of Talent Boost, joins Count Me In to discuss what accounting and finance professionals often get wrong when calculating business value. Claire is an Acquisition Integration and Onboarding Specialist She is also a "corporate survivor" who draws upon almost 30 years of business, leadership and consulting experience to advise the investment community on how to turn the biggest wildcard - people - into their safest bet. While leadership capacity and depth of talent have the greatest impact on the success or failure of any business, most investors believe that this "wildcard" is impossible to measure. Not true! In this episode, Claire discusses various aspects of M&A activities and helps listeners understand what accounting and finance professionals can do RIGHT when calculating business value. Download and listen now!
Claire's Website: https://www.clairechandler.net/
Talent Boost: https://www.talentboost.net/checklist
FULL EPISODE TRANSCRIPT
Welcome back to Count Me In, IMA's podcast about all things affecting the accounting and finance world. This is your host Mitch Roshong and I would like to say thank you for coming back and listening to another episode of our series. The guest speaker for episode 145 here today is Claire Chandler an acquisition, integration, and onboarding specialist. Claire is a corporate survivor who draws upon almost 30 years of business leadership and consulting experience. One of her specialties is business value creation. In this conversation, you will hear her discuss what finance and accounting quite often get wrong when calculating business value. Keep listening as you will now hear from Claire Chandler with Adam Larson.
So Claire, according to stockanalysis.com, I was reading that there have been over around 703 IPOs in the US stock market in 2021 as of around mid August, which is when we're recording this, which is 331% more than the same time in 2020. So needless to say, there's been a lot of business valuation happening as companies seek to grow and expand. So as we start off our conversation, can we talk about what drives the value of business?
Yes, please. Yeah. What a great question to open up with, right. So, you know, back in the day we lived in an industrial economy, I think a lot of people make the mistake of thinking we are still there. and back when we were more industrial close to a hundred percent, about 95% of the value of a business, any business was driven by tangible assets, right? So things like a company's technology, the products that it made and sold, their operations and of course their financial capital, but we don't live in an industrial economy anymore. We actually live in an intellectual economy. That economy is dependent primarily on the output of a human mind. And I know that sounds bizarre when I say it out loud, but think about it. We're really driven by intangible assets companies, brand its services, more so than its products, the intellectual property, that the knowledge in the heads of the human capital, right? And so with this shift that has happened gradually, but we are fully ensconced in an intellectual economy. That shift also, changed what drives business value. So before it was almost entirely driven by tangible assets today, it's well over 72% driven by the intangibles. And we're seeing this across every industry - in some industries, if you look at say tech and pharma, they're close to a hundred percent driven by intangible assets, right. The products of the human mind. and so it's really critical that businesses pay attention to that.
And then on top of that, you not only are you having to worry about the numbers and the financials, you have to start worrying about, things like ESG and sustainability are becoming more and more essential that you have to report, not only the mind, but also how, how is my business affecting the environment?
Yeah, and it's, and it's interesting to that point, the markets have shifted in that way as well, right? The SEC has become more stringent and, has raised its expectations on what companies do, not only in the sustainability space, but also in terms of how people are treating and nurturing the human capital. So the markets have shifted, the economy obviously has shifted and, you know, the, the more successful businesses have embraced this and sort of incorporated that into their business strategy.
So as we're thinking about businesses and, getting investors and growing IPOs, the other thing I was reading, I saw an article on Fortune the other day, it was saying that there's been over $2 billion of mergers and acquisitions activity in just 2021. I think that was through July, like the beginning of July. We're now like to mid August, you know, how can investors reduce the risk of investing in the wrong company, especially with so many different factors that we were just talking about.
Yeah, it's, it's a huge question. Obviously, the bottom line is investors want to make their money back, in multiples, right? And so the way that to reduce the risks starts with their value creation plan hypothesis. They need to be crystal clear on their end goal, right? The clearer they are on what they want to get out of that portfolio company on the back end, whether it's a holding period of three years, five years, you know, even longer the clearer they are on that going in, the easier it is on the front end to make sure that the company they're evaluating actually has the capacity and the capability to deliver that return for them. Because obviously that is the goal, whatever form it takes, that investor wants to get the most bang for their buck. So they've got to be really, really clear on the hypothesis going in on what they expect to get out of their VCP.
So then on the other side, what about what should companies be doing to, to attract the right funding? You know, cause you got to think about their side too.
Yeah, absolutely. And it's, and it's all about the right funding, right? To your point. And it's a similar process for companies on that, on that side that are looking to grow through the backing of the right investors. So they need to be really clear on their end goal as well. And it's probably not as far out for them, it may not be five or 10 years. It may be, you know, 12 months to 36 months, but they need to deeply understand where they want to take their business and how ready they are to grow in that direction with, or without funding. Right. So, and I say that to really make this point, a lot of startups make this fatal mistake of believing that money is going to solve everything right. We get to the next level. If only we have the financial capital and that's totally false, they really need to evaluate their capacity and capability just like the investor is going to do. Before that investor comes in and does that for them and finds that they're not really ready to grow and scale. So it's not just about getting investment. It's about understanding why you need that investment. Are you ready to take that investment and who is the right source of that funding?
Yeah. Because somebody could come to your startup and say, we're going to give you $2 billion, but if you're not ready to grow, then that $2 billion would just kind of go to waste.
It's going to be a wasted bet on, and both sides are going to be complete failures in that regard, right. Especially if you're talking about an investment to the tune of, you know, a billion dollars or more an investor is not going to do that on a wish and a prayer, they really do need to be very, very thorough in vetting the company they're about to put their money behind. And the company itself has to be really self-aware and disciplined before they take on that level of funding.
So I can imagine that there's going to be mergers and acquisitions that aren't successful. We can, you can read about the famous ones when, I forget which company bought AOL, you know, no one really knows what AOL is anymore. You know, stuff like that. Why do most mergers and acquisitions fail to create value?
Hey, so, you know, in my, in my defense, I still have an AOL email account. it, it's my it's the oldest one I have. And I'm a little bit nostalgic, I guess. So it's, I still use it for personal email, but I digress. Yeah. So Bain and company, it's one of the big, you know, research, houses and they do a lot of work in this space. they put out a global private equity report earlier this year that found that 58% of MNAs fail to create value. And one of the main reasons that they fail is because they over-index on the tangible side, right? They over-index, they over-focus on the due diligence side, the integration side and the management side post-close on those tangible assets that we talked about. And what's interesting is that same study by Bain found that the number one reason deals fail is the quality of the human capital within that portfolio company, specifically the top management team. And so what the sort of the good news about that and I mean, an eternal optimist. So I always look for the silver lining. The good news on that side is that the quality of that top management team, which again, is this combination of their capacity to get to the next level and their capability to, you know, to put the horsepower behind it in terms of depth of talent, et cetera. It's also the number one reason deals succeed. So if you look at that in black and white, if that is the number one variable or wildcard is your human capital on both the failure side, the success side, why wouldn't you spend way more time and attention and effort on evaluating that.
That makes a lot of sense. Do you think that there's an element of the virtual capital? Like the things you can't see, the intangibles, besides the human capital, that could be an element of that, that it's hard to measure that we can't really see.
Yeah. You know, that's, that's always the biggest, I think mental stumbling block when I talk to, you know, folks in the investment community and I say, you really need to spend more, more time and attention measuring and assessing those intangibles. And invariably, they come back to me and they say, okay, that's great. I get that. That's the biggest wildcard I get what Bane is telling us, I get that just from past experience, you know, the, the human behavior, performance capability, capacity, all those things are the biggest wild card. And then the products of that, right? The brand, the ability to innovate, the ability to solve problems, all of those things. but then they follow that up with saying, but they're humans, we can't measure that they're unpredictable, they're total wildcards. And the answer in fact is you can measure that there are ways. And in the work that I do, there are, there are tools, there are scientifically validated tools that will measure and assess these things that we're talking about, the capacity, the capability, the mindset, the coachability often, that's a big stumbling block for an investor coming into a company and saying, you got from point A to point B. We want to see if you can get to point C. There are ways to validate before you put your money behind that business. Whether that top management team can actually receive that coaching that advice and change the way that they do things from management by chaos to a more structured way to get to the next level.
So as I'm kind of thinking about how this connects to our audience, you know, the accounting and finance teams, what can they do right when calculating business value, because I'm sure that they'll be integral in calculating the business value when it comes to ventures or IPO's and all that stuff.
Yeah. They are absolutely integral. And I honestly think our friends in finance and accounting have the best opportunity to turn the tide right. To sort of tip the scales away from over indexing on tangible assets and really incorporate into their process, more of an evaluation and valuation of the, of the intangibles. So, you know, how do you do that? Well, instead of just focusing on, you know, quantifying head count, quantifying customers, taking a look at, you know, have they gotten into any legal trouble in the past, you know, counting up all of the widgets and the tangible assets that make up a company, really upskilling, starting a due diligence that, you know, their process for evaluating, the intangible side, which we already know across every industry drives the majority of the business value. So they need to find ways to evaluate that capacity and capability specifically at the top management level. but they also need to evaluate the depth of the talent behind them. And if they do that, if they find ways to do that, or if they find people like me - we are out there - to help them do that. They're going to be able to help their companies invest in the right businesses with far less risk and far more confidence in success.
Are there specific things that they should avoid when doing that valuation? I know you gave some great pointers there, but what are some steps that they should really avoid or some, some red flags they should look out for?
Yeah. so it's interesting that you say red flags. So I, in the work that I've done, in some of the valuations that I've done for investors, and even on the, on the, on the company side, I have a, sort of a framework that I use and I put together a checklist that I can give your audience, the link to, they can go out and in, in grab it, but it's a great way for companies and investors to, sort of do a self-check on it. It basically comprises the 11 dimensions that drive performance and profitability. So the checklist kind of takes you through each of those 11, and you can sort of self-assess on the company side, or as the investor looking into a prospective company, you know, just sort of rate those things, following the checklist and what it will yield for you is it will help you identify what are my top three profit levers, right? So what are the three dimensions that we have that we have in spades that are competitive advantages for us, that if we put the right horsepower, the right attention behind it, they can really drive the business forward. And conversely, it will help you uncover what are the top three risk flags, red flags, potential derailers that could sink your business. And so investors have used that checklist, yes, for the profit levers, but more specifically to say, are there any answers in here that are deal-breakers that if we knew this upfront, if we paid some attention to this and follow this checklist would make us walk away. So it's really, really important from, from both sides. One to help you press your advantage and play to your strengths, and also to make sure that you go in with eyes wide open and verify before you buy.
Yeah. Verify before you buy is I think it's something that we all should keep in mind no matter what you're doing for sure.
Well, Claire, I really appreciate you coming on our podcast today for sharing your insight. I know that our audience will be really be greatly receptive to it.
Well, it's my absolute pleasure. if anyone in your audience does want to grab that checklist, they can go to my website. It's talentboost.net/checklist is the fastest way to get to that checklist. Otherwise, if you just go to talentboost.net, there's a button at the top click on checklist. and as you kind of go through the checklist, if you have any other questions you want to reach out and talk specifically about where you are in your business, has somebody like me can help you get ready for your next level. Go to the top of that same page. There's a big button that says, book a call, click that button, pick a time and let's chat.
This has been Count Me In, IMA's podcast, providing you with the latest perspectives of thought leaders from the accounting and finance profession. If you like what you heard, and you'd like to be counted in for more relevant accounting and finance education, visit IMA's website at www.imanet.org.