Valuation & Value Creation
The 5 Bridges of Scaling Enterprise Value
How an owner-run business becomes worth more by defending six cash flows in turn, each to a stricter buyer, across the five crossings between them.
The Adaptive Decomposition Grammar
One set of rules that breaks any business metric down to the measurements someone owns and can move, with every link computed, evidenced or flagged.
The Adaptive Valuation Kernel
One computable equation for the value of a stake in any business, the decisions it forces before any number is computed, and the reasoning behind each of its terms.
The Bridge from Adjusted EBITDA to Free Cash Flow to the Firm
How a business that earns reliably becomes one whose cash a buyer can model, why most of the value on this bridge comes from the capital the business stops carrying, and who should stop at free cash flow to the firm.
The Bridge from Free Cash Flow to Equity to Cash Available for Distribution
How a business whose debt has proved itself becomes one that pays its owners a reliable income under rules that hold in a bad year, why most of the work on this bridge protects the payout instead of enlarging it, and why every owner should cross it.
The Bridge from Free Cash Flow to the Firm to Free Cash Flow to Equity
How a business whose cash a buyer can model becomes one whose cash has been seen to carry its own debt, why borrowing by itself creates no value, where the little value on this bridge comes from, and who should stop at free cash flow to equity.
The Bridge from SDE to Adjusted EBITDA
How an owner-run business becomes one that earns the same with nobody indispensable in it, why most of the work moves risk more than it moves profit, and who should stop at adjusted EBITDA.
The Bridge from Traction to SDE
How a business that is still a story becomes one owner's earnings a stranger would pay for, what moves its value on the way, and who should stop there.
Add-back Tightening
Why the adjustments a seller adds to earnings are the first thing a buyer's accountants attack, and how a short schedule of documented, historical, one-off items gets through a quality-of-earnings review intact.
Asset Stewardship
Why a buyer's engineer will find the worn-out fleet or the failing roof whether or not the seller does, and how a verified register, qualified ratings and a five-year plan turn the business's assets into a schedule the seller has already priced.
Audit
Why a yield buyer will not capitalize a coverage figure computed from statements nobody has opined on, why an audit reveals value without creating it, and how a run of audited years, agreed procedures on the coverage schedule and a closed management letter put the payout on numbers an outsider has tested.
Balance Sheet Quality
Why working capital can look healthy while it carries invoices nobody will pay and stock nobody will buy, and how aging, an observed count, honest revenue recognition and a sweep for hidden obligations make the balance sheet mean what it says.
Board Governance
Why a buyer cannot tell a distribution from a withdrawal when the person who decides it is the person who receives it, and how a board with a genuinely independent member, minutes with every test attached, and a quarterly report to the owners make the payout a governed decision.
Books
Why books good enough for a tax return and an owner-operator are not good enough for a fund, and what accrual accounting, a three-year record, proof of cash and an outside review each add.
Budgeting
Why a buyer who models a business's future first asks whether its management has ever predicted a year, and how budgets built by the leads, a record of landing close to them and every variance explained in writing give a forecast its first evidence.
Business Foundation
Why a business has to exist on paper before a buyer can buy it, what that takes, and why the paperwork that changes nothing about the cash flow can still decide who is able to buy.
Capex Discipline
Why a capital spending record that cannot tell maintenance from growth lets a buyer deduct the larger figure, and how a fixed policy, a classified schedule and a reconciliation to depreciation make the split the business's own.
Capital Structure File
Why every claim on a business's cash that ranks ahead of its owners belongs on one schedule before a lender or a buyer looks, and how an inventory built from contracts, papered shareholder loans and a reconciled capitalization table stop the equity being repriced on every find.
Cash Management
Why a business that is profitable on paper can be short of cash at every payroll, and the forecast, collections routine and reserve that let it carry itself for a full year without its owner's money.
Cash Visibility
Why a business should know how much of its EBITDA becomes cash before a buyer's analyst computes it, and how a monthly cash flow statement, a forecast whose accuracy is tracked and an explained conversion ratio let the business see its cash in advance.
Covenant Management
Why a business that learns its covenant position from the quarterly certificate learns it too late, and how monthly tests on the agreement's own definitions, a trigger set well above the covenant, an action list written in advance and certificates that show it keep a bad quarter from becoming a default.
Coverage Management
Why a coverage figure produced for a buyer tends to be defined to flatter, and how a definition fixed in the policy, a quarterly trailing report, a forecast that triggers the cut rule before a quarter fails, and a downturn already passed give a yield buyer a coverage record it can capitalize.
Customer Spread
Why earnings carried by a few relationships are priced as earnings that can leave with the seller, and the customer list, contracts and two-year history that show a buyer the year will repeat.
Demand Engine
Why growth in a small business is worth nothing to a buyer until it is evidenced, the four records that evidence it, and what each one tells a lender about the future.
Diligence Readiness
Why the first diligence request list is where many sales start to lose value, and how a maintained customer schedule and a liabilities file with nothing in it answer the list on the day it arrives.
Direct Cost Capture
Why a business that makes money overall still cannot say which of its lines do, what it takes to record the cost of every sale against the line that earned it, and what a buyer assumes when nobody has.
Distribution Mechanics
Why a well-judged distribution can still be unlawful, wrongly allocated or incomplete for tax, and how an owners' agreement that governs every payment, a legality test before money leaves, and tax distributions computed and paid on schedule make the declared figure the one each owner keeps.
Distribution Policy
Why a payout that depends on how the cash looks cannot be capitalized, and how a written order of uses, a ratio sized to a stress case, cut and restore rules agreed in advance, and one worksheet for every distribution let a stranger forecast the next payout.
Entity Structure
Why a family of companies that grew one decision at a time leaves a buyer unable to say what it is buying, and how a structure chart, arm's-length agreements and a written perimeter of sale define the business being valued.
Facility Close
Why owners give away what they negotiated in the weeks between the term sheet and the signed loan agreement, and how covenant definitions aligned with the pack, a debt schedule traced to the signed documents and personal guarantees released at closing keep the debt with the company.
Facility Sizing
Why the right amount to borrow is usually less than a lender will offer, and how a facility sized to the downside, compared across lenders on its covenants as much as its rate, and laddered so no single refinancing can threaten the owners, earns the one certain source of value debt provides.
Fixed Cost Discipline
Why breakeven in a growing business tends to move away as fast as sales approach it, and the budget, the approval rule and the one number that hold it in place.
Forecast Model
Why a buyer who models will build its own forecast unless the seller's reproduces the history, reaches cash and survives review, and why the value the model's cash flows produce should govern, with the market multiple kept beside it as a test of the price.
From Adjusted EBITDA to EBITDA less Maintenance Capex
Why the first deduction on the third bridge is the spending that keeps the business running, and why separating it from the spending that grows the business decides how much of the earnings a buyer will treat as free.
From Cash Conversion to NOPAT
Why the third span of the third bridge asks two questions owners rarely separate, what tax the business pays and what exactly the business is, and why a buyer who cannot get an answer to either will assume the worst about both.
From Cash Flow Available for Debt Service to Debt Capacity
Why a lender sizes debt on the bad year instead of the expected one, why a business should borrow less than it is offered, and how a forecast with an honest downside, a facility tested with more than one lender and a structure that keeps funding growth set how much debt the cash flow should carry.
From Debt Capacity to Levered Cash Flow
Why the dangerous moments in a business's borrowing are the signing and the first bad quarter, and how documents that match the term sheet, guarantees that belong to the company, covenants watched monthly against the business's own trigger and a written rate policy keep the debt in place on its own terms.
From Declared Distributions to Distribution Coverage
Why a payout that has only been paid in good years tells a yield buyer nothing about the bad one, and how coverage defined once, reported every quarter and held through a real downturn, on statements an auditor has opined on, turns a payout policy into a tested record.
From Distribution Coverage to Cash Available for Distribution
Why a payout that will end with the current generation is priced as though it will, and how a funded buy-sell, a successor for every senior seat, a route to cash outside the payout, a change of owner already survived and a file that values each stake at a stated level let the payout outlive the people who set it up.
From EBITDA less Maintenance Capex to Cash Conversion
Why the cash tied up in running a business day to day is where most of the value on the third bridge is made or lost, and the three pieces of work that manage it, clean it and measure it.
From FCFE less Reserves to Declared Distributions
Why a payout set when cash looks plentiful is a pattern a yield buyer cannot capitalize, and how a ratio sized to a bad year, a board with an independent member that records its tests, and an owners' agreement that makes every payment lawful let a stranger forecast the distribution.
From First Revenue to Gross Profit
Why making sales does not yet show that a business makes money on them, and how pricing, cost capture and evidence of demand turn revenue into gross profit a buyer will believe and expect to grow.
From Free Cash Flow to Equity to FCFE less Reserves
Why the first step toward a reliable payout is deciding what must stay in the business before anything is called distributable, and how funded reserves, a maintenance floor set from the assets and retained cash that must earn its keep make the distributable figure one a yield buyer can capitalize.
From Free Cash Flow to the Firm to Cash Flow Available for Debt Service
Why the first thing a lender does is compute its own version of the business's cash, why it lends on the lowest version it is shown, and how a monthly pack on the lender's definition and one schedule of every claim ahead of the owners make the lender's number the business's own.
From Gross Profit to Operating Breakeven
Why making money on each sale is not the same as making money, and why the test that matters is a business that has paid its own way, in cash, for a full year.
From Levered Cash Flow to Free Cash Flow to Equity
Why debt that has only been serviced in good months proves nothing, and how a seasoned record, a finance lead who owns the lenders with a second lender ready, and a file that values the owners' cash behind the lender turn levered cash flow into equity a buyer will price on its own terms.
From NOPAT to Free Cash Flow to the Firm
Why the last span of the third bridge is about the business's future, and how a budget with a record, a model that reproduces its own history and a register of what reinvestment earned turn a seller's forecast into one a buyer will start from.
From Normalized SDE to Pro Forma EBITDA
Why the second span of the second bridge prices the owner's job before anyone is hired, and why that number usually lands lower than the owner expects and has to be survivable anyway.
From Operating Breakeven to Owner's Draw
Why the fourth measure on the first bridge is the owner being paid from profit, and the work that makes that pay regular, covered by profit with room to spare, and lawful.
From Owner's Draw to SDE
Why the last span on the first bridge turns earnings an owner believes into earnings a stranger can verify, and the four pieces of work it takes to get there.
From Pro Forma EBITDA to Reported EBITDA
Why the third span of the second bridge is where the business stops depending on its owner in fact as well as on paper, and the three pieces of work that prove it.
From Reported EBITDA to Adjusted EBITDA
Why the last span of the second bridge is a rehearsal for a buyer's diligence, and the four pieces of work that leave nothing in the adjustments, the customer book or the files for a buyer to find.
From SDE to Normalized SDE
Why the first span of the second bridge raises the standard of the books from records an owner-operator will accept to records a fund's diligence team will, and what it means to normalize the earnings.
From Traction to First Revenue
Why the first measure on the first bridge is revenue in a narrow sense, cash from customers a buyer can trace and believe, and the two pieces of work that produce it.
Growth Capacity
Why the first casualty of debt is usually growth, why that makes it the most expensive mistake on the bridge, and how a reinvestment plan funded below debt service, baskets that let it run without asking, an undrawn line sized to the downside and a record of growth continued keep a borrowing business growing.
Inspecting Adjusted EBITDA
What is checked before a business's adjusted EBITDA is accepted, why much of the checking now passes to professionals a buyer would send, and how the inspection asks whether the last crossing paid the owner at all.
Inspecting Free Cash Flow to Equity
What an income investor checks before relying on a business's levered cash, line by line, who checks it, and why the fifth bridge starts only once the debt, the growth under it and the value of the equity have all passed inspection.
Inspecting Free Cash Flow to the Firm
What a lender and a modeling buyer check before they accept a business's free cash flow, line by line, who checks it, and why the fourth bridge starts only once the cash, the forecast and the valuation file have passed inspection.
Inspecting SDE
What a careful buyer checks before accepting a business's SDE, why each check exists, where a business that fails is sent back to, and the ways a business slips off the anchor after it has reached it.
Lender Relationships
Why a bank relationship that rests on the owner's friendship with a branch manager is a risk to the equity, and how a finance lead who owns the lenders, a second lender who has looked recently and every maturity planned well ahead make borrowing a decision the company can take without its owner.
Lender Reporting
Why a lender that has to assemble a business's numbers lends on the worst version it sees, and how a monthly pack on the lender's own definitions, reconciled line by line and delivered on a fixed day, makes the lender's number one the business already reports.
Levered Forecast
Why a credit committee sizes debt on the stressed case and builds its own if the business does not, and how a thirty-six-month forecast with a downside fixed in advance, a record of hitting it and a stated rate policy let the business's own evidence set the size of the debt.
Management Install
Why hiring a general manager so often leaves a business as dependent on its owner as before, and how a job built from the seat's own procedures, a handover that runs on dates, an agreement with the company and a second name on every critical account make the hire take the weight.
Margin of Safety
Why an owner paid from profit still needs to know how much room the profit leaves and which lines produce it, and the rule that keeps the draw from outrunning the business that pays it.
Monthly Close
Why books caught up once a year for the tax return cannot support a sale, and how a monthly close, a reconciliation to the returns and a compliance file turn an estimate of earnings into a figure a stranger can verify.
Owner Pay
Why the first number a buyer prices in an owner-run business is usually the one its owner cannot state, and how a fixed draw and a clean ledger turn it into a fact.
Pay Structure
Why the form an owner is paid in can create a tax exposure a buyer will find in an afternoon, and why one documented market salary for the owner's seat decides how much of the profit was ever profit at all.
Paying Customers
Why the first customers a buyer will believe in are strangers who paid full price, and how a young business wins them in a way that can be repeated and proven years later.
Pricing
Why the most valuable piece of work in a young business is usually the price sheet, how a price built from cost differs from one copied from a competitor, and what keeps a good price from eroding.
Rate Risk
Why a business with floating-rate debt has handed part of its cash flow to the bond market, and how a written policy, hedges priced against the stress they protect against and instruments kept on the debt schedule make levered cash flow forecastable when interest rates are not.
Reinvestment Floor
Why the easiest way to raise a payout is to stop replacing what the business runs on, and how a register priced at today's replacement cost, a maintenance floor written into the distribution policy and a record of spending at or above it make sure the payout comes from earnings and not from the assets.
Reinvestment Return
Why growth is worth paying for only where the cash reinvested to produce it earns more than it costs, and how a register of every growth project, a measured return and a forecast whose growth is derived from them turn a seller's growth rate into one a buyer will credit.
Reserve Policy
Why the cash an owner sees in the bank is not a reserve, and how a written rule sized from the business's own worst quarter, separate accounts that one person cannot empty, a refill rule that stops the payout until the reserve is whole, and a test before every distribution protect the payout from the first bad quarter.
Retained Growth
Why a payout that grows because last year's did is a promise nobody has priced, and how a stated growth stance, the return on retained cash reported against the owners' required return, and a written year for growth to settle let a yield buyer capitalize growth the business has actually earned.
Role Costing
Why the owner of a small business is usually several jobs, how a time log and a market benchmark price each one, and why the number a buyer's model deducts should never come as a surprise.
Sales Engine
Why a buyer assumes growth stops the day the owner leaves unless a sales function shows otherwise, and the five records, from customer cohorts to a quota hit without the owner, that let growth be priced.
SDE Schedule
Why the schedule of add-backs is where an owner-run business is most often argued down, and how a schedule built from the ledger, sourced line by line and walked by an outsider, survives the first meeting.
Seasoning
Why debt that has only ever been paid in good months tells a buyer nothing, and how a soft quarter or a refinancing carried without a breach or the owner's money, written up in a short memo, with the owners' cash reported every month, gives the equity a record of surviving stress.
Separation
Why every arrangement between a business and its owner's family has to be at market or gone before a fund will price it, and how the schedule of adjustments shrinks to lines a broker can defend one by one.
Tax Position
Why the tax a business's operating profit bears is a number its owner often cannot state, why a buyer will supply a harsher one, and how a reconciled memo, a stated rate and a study of where the business owes tax replace the buyer's guess.
Traction
What a business with a product and a few customers but no settled earnings is worth, why that value is a bet and not growth, and the low bar a business clears to start the first bridge.
What Adjusted EBITDA Is Worth
What a business that earns the same with nobody indispensable in it is worth to a buyer who will not run it, why the same cash flow is worth more to that buyer, and how the valuation keeps the multiple from deciding the answer.
What Cash Available for Distribution Is Worth
What a payout governed by rules that hold in a bad year is worth to an income investor, why it is valued in two stages and never as a perpetuity, why every number at this anchor must name its level of value, and how the framework's last valuation tests whether the whole crossing paid the person who holds the stake.
What Free Cash Flow to Equity Is Worth
What the owners' cash behind a senior lender is worth to an equity buyer underwriting alongside that lender, why the equity may be valued directly only once the debt has proved itself, and why the same business's equity is a riskier number than its enterprise value.
What Free Cash Flow to the Firm Is Worth
What a business whose cash is measured and whose future can be forecast is worth to a buyer who models rather than multiplies, why the discounted cash flow governs here for the first time, and how the file keeps the rate, the growth and the price from deciding one another.
What SDE Is Worth
What one owner's earnings are worth to the next owner, why a multiple of SDE is a price and not a value, and why many businesses at this anchor are worth little more than what it would cost to rebuild them.
Working Capital Management
Why working capital is the most valuable thing to manage on the third bridge and the most contested number in a sale, and how one definition, a computed peg and managed days turn it from an argument into a schedule.
Basic Financial Projections
Financial modeling is a common tool used in business to make projections about potential outcomes.
Business Model & Business Plan
Business plans and business models are two terms that are often used interchangeably, but they are actually quite different.
Compensation Strategy
In any business, your people are your most important asset.
Free Cash Flow Analysis
Free cash flow is an important metric for evaluating a company’s financial health.
Lean Productivity
Revenue alone is not enough to ensure the long-term viability of a business.
Operating Budgets
Operating budgets offer a multifaceted perspective on cutting expenses.
Preparation for Growth: Sell or Scale
When your business is running smoothly, you have an important decision to make: whether to sell the business or scale it up.