How to Evaluate a Company Better

There is something missing from conventional wisdom on evaluating businesses to invest in or acquire. I have come to this realization through my own experience as a founder, with all my education in finance, operations, and statistics. Conventional wisdom is missing something important. Without this missing ingredient, businesses cannot reach their full potential and therefore are undervalued for purchase and for sale.

An ingredient is an apt analogy as a recipe may seem great, but without a skilled technique to bring it all together, the results will be less than its true potential. In the same way, what is perceived as a great business might be merely a good business if it lacks the right finesse. 

What is missing...?

For me, the answer is obvious—a superior business methodology. No matter how great the sum of its parts, every organization needs a unique ecosystem for all functions to work together sustainably. To create this ecosystem, I have developed a unique algorithm that consistently produces greater results for all involved.

Patterns to Greater Value

One reason the contribution of the business methodology is under-discussed by investors is that most people don’t have the expertise to assess, quantify, and design an organizational playbook to release all potential value. People generally are not able to drill down to assess the DNA of a business as it may seem too complex, with too many variables to create reliable predictions to base future released value on.

While it is not an easy pattern to identify, my team and I have developed a superior business methodology through years of experience. This methodology is structured on a specific design of organizational behavior. If you do not address the key ingredients you are overlooking a major factor that determines the ultimate success of your investments.

When I ask investors and owners if they want to renew their business, most say, “absolutely.” This is true for investors with new investments into their businesses as well. Anyone can get excited about chasing the next unicorn startup, but even market disruptors need a solid foundation to operate from. This might seem at odds with the “fail fast” lean startup mantra, but the less people need to manage day-to-day and year-to-year operations, the more they can focus on true innovation, like pealing an onion, with dynamically scoped and scaled innovation at every layer.

Even within daily operations, you need to put ideas into action and test them quickly to find out what works and what doesn’t. If you want to shake things up, you need to know how to re-stabilize quickly; otherwise the whole organization will over-spend and under-leverage its value.

Whether you are working on a new acquisition, a complete turnaround, or maximizing the value of an already good company, I wanted to share the three factors I assess and compose to achieve better harmony and create a superior ecosystem:

Mindset

This pertains to the DNA of the organization’s top management and how top leadership’s ethos is internalized by all staff at all layers of the organization. We assess this value and contribution that exists in businesses being considered for purchase. This is not just a mode of thinking but how leaders identify the organization’s purpose and how that is translated and adopted by employees who have direct communication with the customer.

How effectively this mindset is contextualized forms the first variable of the future value potential of the business based on the employees’ contribution to the overall goal. The mindset variable here determines the relative gap between where the business is today and how we will be able to shift the value curve in the future. 

self-Management Process

This refers not to the standards themselves but to the organizational structures that people work within. Without the best management processes, even people with the right mindset will not be able to effectively put their ideas into action. This forms the second variable in the algorithm. From the top, there also must be a mechanism for communication, collaboration, and self-management across all roles, all departments, and all levels of hierarchy in the business. It is this overall success and value of the company that matters, not the success of any one department or individual. The self-management processes must connect everyone. Depending on the business and all its functions, we define current value and future value here as well.

Technology

It is vital to understand the company’s current technology during the assessment and forecast more appropriate technological resources for the future. As technology continues to progress at a rapid pace, it is vital to keep it in perspective. Technology is not a substitute for the other variables, but it is complimentary.

Any investment in technology must leverage mindset and self-management. Most of the time, businesses do not get this right. In fact, this is so true so many times that I have had to invest in myself and others to develop our own technology and information systems to support businesses as they align mindset and the ecosystem of self-management. We assess technological gaps in the business, forming the final variable of the algorithm—technology. Our design and implementation of technology and information systems amplifies mindset and self-management to achieve organizational productivity. People put their discretionary effort and ideas into their work because technology and information systems are directly tailored for their individual needs—these systems help them to be more successful. This is our expected level of engagement to build our final playbook based on the value not yet unlocked in the business.

Good Businesses Become Greater Businesses

These three factors will not replace great founders with great ideas. They also won’t help you if the timing is not right in the market. When you invest in a company, we will make sure you get the greatest ROI, at the fairest price, in the shortest period of time. This is true whether you sell the business again or are able to release more cash to pay off any leverage.

What my team and I are able to offer is unparalleled expertise to recognize and quantify under-valued businesses, ensuring that your purchases are based on fair market value, and reducing the overall risk while showing the pathway to higher returns. In our partnerships it is common to acquire business at a relative value discount of 50% and release 2 times sales value compared to normal models.