How Bailout courses of action should affect your business model

This article from the 2001 Nobel laureate in economics is a concise and cogent description of the courses of action re: the bailout.

We’re pleased to see that someone is talking about the need for quality due diligence and the potential risks of shoddy or slight investigations into value. We have pushed this message with our M&A acquiror and PE investor clients. They understand pretty readily once the costs are discussed.

Where we still find the most disbelief or unwillingness to accept the facts that diligence leads to estimates of value that support transactions that actually get executed is on the target/portfolio company side of things. Founders and CEOs find it difficult to explain how they will actually achieve the numbers in their projections; we often find that the fundamental business model is unexamined. By business model, we mean not the spreadsheet itself but the concept of the business, in terms of how efficiently a company uses its invested capital to produce revenue, how well it controls product costs as it converts revenue to gross income, how it controls operating expenses as it achieves EBITDA numbers, how it organizes its capital structure as reflected in EBT, and how it manages tax issues as reflected by Net Income, and finally how it balances reinvestment in the business and invested capital as we turn to a pure free cash flow (FCF) number.

We are building new tools and offerings to help companies at the board and senior management level think about their business model in the level of detail required to understand the implications of investor expectations. We focus on simplifying complexity to help direct management attention to the right links in the FCF value chain.

As we start presenting our ideas to the market, we’ll announce more here.

1 Comment

  1. Governance failures in compensation on October 26, 2009 at 4:01 pm

    […] I support the use of free cash flow as the primary metric for executive compensation, although a detailed FCF analysis might give a board specific sub-targets for a C-level officer to achieve in pursuit of higher FCF. […]

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