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!

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.

Yeah. Yeah.

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.

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