Intentional Growth #310: Intrinsic Financial Value–The Value of a Business Based on the Risk of Its Cash Flow with David Diehl
Ep. #2 [THEME THREE]
If you focus on growing the intrinsic financial value of your company (the value based on the risk of the cash flow), you can engineer the future valuation you want as long as you have enough time and capital–all while focusing on the right strategies that de-risk the company’s cash flow (therefore increasing the multiple) while increasing your normalized EBITDA. A lot of business owners don’t understand how intrinsic financial value works, but we haven’t done a deep dive on it yet. Until now.
Dave Diehl is back on the show. He is the CEO of Prairie Capital, a nationwide investment banking firm that specializes in helping business owners transition via ESOPs, management buyouts, and third party buyers.
In this interview, Dave talks about the different types of risk within a company–from the financial buyer's view–and how an entrepreneur can lower that risk and, therefore, increase the valuation. He is the perfect guest for this topic because Prairie does 425+ ESOP valuation updates each year and works on countless transactions that are valued and structured based on the intrinsic valuation of the company.
This episode is quite literally a treasure trail to help see your company's valuation through the eyes of a financial investor and understand how to increase the equity value over the course of a couple of years.
//WATCH THE INTERVIEW ON YOUTUBE: Intentional Growth™ Podcast
What You Will Learn
- How a financial buyer perceives risk in a company.
- Dave’s thoughts on the discounted cash flow (DCF) approach vs. the market approach to a valuation.
- How a financial buyer views past cash flows compared to future projections and the weight they place on each when determining the value of a company.
- The value of being able to tell the story of the business using the financials, answering questions, and how it all contributes to the trust a buyer has in a seller and their perception of risk.
- Why focusing time on management and a future successor is something every entrepreneur needs to focus on.
- Why the intrinsic financial value can only yield a certain valuation and how the deal structure and payoff proves that point.
- What the capital stack approach to a valuation is and why it matters.
- The market approach vs. a discounted cash flow model vs. a capital stack.
- Why external events (like a pandemic) can affect your purchase price (even if you have done everything right).
- What re-trading a deal is and how it can be dependent on the external economic climate.
- Why a growing company–all things being equal–can be worth more than a company that has maintained the same EBITDA.
// USE YOUR FINANCIALS TO CLARIFY A PATH TOWARDS A MORE VALUABLE BUSINESS: Intentional Growth Financial Assessment
Bio:
David Diehl joined Prairie Capital Advisors in 1999 and is a shareholder in the firm. He is also a member of Prairie’s Board of Directors. Dave provides closely-held businesses with a complete understanding of the best available options for their ownership transition needs. He expertly executes mergers and acquisitions (M&A), management buyouts (MBOs), employee stock ownership plans (ESOPs), estate planning and other corporate finance transactions. Dave serves as a trusted advisor to a diverse range of clients nationwide delivering highly strategic consultation.
With extensive end-to-end management experience and a focus on his clients’ success, Dave helps ensure an exceptional ownership transition experience. Dave is also a CFA Charter holder and is on the board of directors of a company that manufactures plastic parts. In addition, he is a frequent speaker in forums around the country on topics including ownership transition, valuation, capital management and the sale of businesses. Dave is also a past chair of the Advisory Committee on Valuation with The ESOP Association.
Interview Quotes:
07:54 - “The biggest thing for us is having satisfied clients and in doing so, we want them to be fully educated.” - David Diehl
10:42 - “What’s important to understand is to really get to the value of things and understanding how that value is derived… Valuation is incredibly important. You really can’t plan without it.” - David Diehl
15:29 - “The past is a helpful means to help you understand what the company can do and perform in the future. When you buy equity, you’re buying the future. You’re buying the future cash flow stream, you’re not getting the past.” - David Diehl
17:00 - “Inherent in that cost of capital is the risk.” - David Diehl
18:00 - “Valuation is all about risk and the assessment of risk in those cash flow streams.” - David Diehl
23:26 - “At the end of the day, valuation is really an academic exercise but there is a lot of art and science that gets combined in it. Because, in order to get a truly accurate valuation, you really need to understand business, you need to understand what’s going on in the outside world from a valuation perspective, and you need to apply risk appropriately relative to what you’re perceiving in the marketplace.” - David Diehl
31:10 - “So whether you reduce the debt or whether you grow the business (or the value of the house) you’re magnifying your returns. That’s what private investors tend to do and that’s how they get their return for the risk they are taking.” - David Diehl
39:49 - “If you look at things from a pricing standpoint in the market, the banks are being very aggressive and pursuing things still.” - David Diehl
46:17 - “Cash flow is everything.” - David Diehl
51:45 - “If you don’t control that narrative, the buyer will.” - David Diehl
Links and Resources:
The 5 Intentional Growth™ Principles (5 Videos to Help Clarify Your Vision)
Intentional Growth™ Financial Assessment
You can also reach out to me via email at rtansom@arkona.io, or on my LinkedIn.