It is highly unusual for me to be introduced into a situation where I have to make this type of valuation. Generally the initial vetting process identifies structures that are not true businesses. Sometimes it is a bit of a surprise for the company to hear the equity group tell them that that, although the structure may be highly profitable, they do not consider it to be a business. Most of the time it is very simple and there are some basic types of companies that can be easily identified as jobs.
Consulting companies are usually jobs, no matter how big they are. There can be consulting companies that are businesses when they offer a wide range of services or technologies. Some examples of consulting companies that are businesses are Deloitte and IBM. Generally companies that offer products or a wide variety of services are businesses but again, there are cases where they are jobs. An example could be a cleaning company that has 1 primary client or a technology company that develops software for one company or a small group of companies.
The identifying factor is often the number of clients, the range of products and that the efficiency of the structure can be improved through economies of scale. This is the 2+2 = 7 relationship. Some sectors create publicly listed companies that are in fact jobs. One drug development firms are an example. These structures are often financed, in the initial phase, by a Pharmaceutical company; their structure is determined by the drug company’s desire to “spread the risk around.” The risk reward relationship on this type of company can make a job like this an appropriate investment.
There are cases where a company seems to be a company but digging down it becomes apparent that the company is actually a job for the people employed there. Last year I looked at a company involved in developing paints that neutralized various pathogens such as anthrax. The initial documentation indicated that there were numerous addressable markets with significant growth capabilities. As I worked into the plan, contacting prospective clients and talking with experts from the scholastic and governmental environments proved that this product could only be used in military applications without making significant changes to the types of pathogens targeted. The end result is that this is a great company for the scientists developing this technology and may bring long term returns for them but it is not an entity in which private equity could invest. In other words, it is the best of jobs, long term return on today’s work but, still a job.
It may be a simple process to transform your company from a job to a business but the first step is to recognize what it is.
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2 comments:
David, this was very interesting because it is coming at an issue - jobs vs business - that is under current discussion among colleagues but in a different way.
On the managing the professional services firm blog - http://professionalservicesmanagement.blogspot.com/ - I have talked about the difference between the self employed professional and the business builder. This equates to the distinction that you have made.
A linked issue is what self employed professionals have to do if they are to sell their practice. This involves creating transferable value independent in some way of the individual.
Jim Thanks for the tip. I will check it out.
The link is Professional Services Blog
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