Ep. 145: Claire Chandler - Calculating Business Value

Contact Claire Chandler: https://www.linkedin.com/in/clairechandlersphr/

Claire's Website: https://www.clairechandler.net/

Talent Boost: https://www.talentboost.net/checklist

FULL EPISODE TRANSCRIPT
Mitch: (00:05)
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.

Adam: (00:55)
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?

Claire: (01:23)
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.

Adam: (03:04)
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?

Claire: (03:20)
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.

Adam: (03:51)
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.

Claire: (04:17)
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.

Adam: (05:09)
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.

Claire: (05:16)
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?

Adam: (06:23)
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.

Claire: (06:32)
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.

Adam: (07:00)
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 kn...