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Business Appraisal · The process of assessing the reasonableness of the asking price of a business, its risk profile and the likely suitability / compatibility for its owner or potential owner. It is not a valuation (it is much broader), but it does consider financial and non financial factors.
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Business Audit · An audit is an independent examination of the financial statements of a business. It consists of a searching investigation of the accounting records and other evidence supporting the financial statements. By studying and evaluating the company’s system of internal control, by inspecting documents, observing processes, making internal and external enquiries, and applying other auditing procedures, the auditor will gather sufficient evidence to be able to determine whether the financial statements present “a true and fair view “of a company’s financial position over the period being audited.
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Business Diagnosis · The process of identifying ways of assessing the businesses priorities in terms of the key tasks associated with of increasing profitability, market share and overtaking competitors etc. By understanding the fundamentals of the business performance (strengths, weaknesses, opportunities & threats) you can determine which objectives & goals are reasonable. In other words, you need to know where you are starting from (or with). Accordingly, notwithstanding the outcome of your annual strategic review process (where you will clarify, your strategic intent etc), understanding and exploring the following diagnosis principles is critical. They are;
1. Analyse your costs and prices – they will almost always decline over time
2. Your competitive position determines your options eg relative market share and market growth (including your chosen strategy)
3. Customers & profit pools wont remain static – what are yours doing?
4. Simplicity is what gets results.
Understanding these points firstly, will generally allow you to maximise the output effectiveness of other relevant management tools and is a must for new and existing business leaders alike.
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Business Franchise · A special & unique way of successfully doing business. A Business Model designed & created to leverage a specific set of management systems & processes (marketing, sales, merchandising, training, financial management, operations etc) which allow for a business to maximise its Competitive Advantage. A buyer of such a business believes he has a greater chance of success due to having a greater understanding of the Critical Success Factors of the business. Moreover, a credible Business Franchise is expected to allow the business to be “scalable”.
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Business Investigation · The process of investigating what should or should not have been done, with regard to a business, its policies, processes, procedures, systems, management capability, strategy, finances, reporting (including prospectuses, offer documents, shareholder agreement, joint ventures, business plans, objectives, goals etc.) Business Investigations are commissioned for many reasons by a variety of stakeholders eg banks, investors, creditors, stakeholders suspecting fraud, for statutory reasons including taxation, compliance, governance, risk management etc.
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Business / Industry Life Cycle · A concept that describes the different growth stages of an industry and or the businesses in it. A definition of the stages: Introduction, Growth, Maturity & Decline. All industries & businesses go through periods of growth, maturity and decline.
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Business Model · describes how the business creates, delivers & captures value (& makes money) through its Sustainable Competitive Advantage. It contains the Value Proposition the business offers its customers
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Business Valuation · The process of determining the financial worth of a company or other business enterprise or entity. The entity might be listed (on a stock exchange) or be unlisted. A listed company has its perceived value estimated by investors constantly buying and selling its shares and thereby “making a market”. An unlisted company will normally have very few interested buyers & sellers, and hence a market for its shares is usually highly illiquid. Whereas similar valuation techniques are used for both listed and unlisted (closely held) companies (regardless of market price), and whereas supply and demand will determine the ultimate price paid for shares in both, a valuation process attempts to determine the “intrinsic value” or “true worth” of a business. No two valuations are the same, and many valuation techniques exist, however three fundamental approaches are normally used. Based on either Intrinsic Value or Relative Value they are generally;
1. An asset Approach
2. A market Approach
3. The Income (or cash) Approach
Simply defined, a business valuation is an examination conducted towards rendering an estimate or opinion as to the fair market value of a business interest at a given point in time. Simplistically, thereafter, as sector or business specific key value drivers change, so will the valuation – understanding their sustainability is crucial. Change can occur quickly. Accordingly, when valuing a business, a notional transaction is assumed, that is, one which has not been subjected to a bargaining process. This is different to an open market or arms length transaction which takes place between willing seller and a willing buyer, Accordingly, Value and Price are two different concepts, It is said that price is what is actually paid or received, while value is what is obtained.
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Business Planning · It is the disciplined, dynamic, & systematic process of thinking about, identifying, organising, scheduling & documenting the activities & resources required to successfully manage a business – it should be continuous. It is the most important thing business managers can do!
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Capitalisation Rate · Any divisor used to convert anticipated economic benefits of a single period into value. It may also be referred to as the capitalisation multiple which is the inverse of the capitalisation rate. eg simplistically, if a 40% expected return is the capitalization rate required to buy a business (because of the perceived riskiness of the business), the value of a business with maintainable earnings of say $300,000 is $750,000 (ie $300,000 divided by 40%). Likewise, the inverse (capitalization multiple) is a multiple of 2.5 times earnings (1 divided by 40%). Investors compare a Capitalization (or risk) Rate with the Risk Free Rate in an attempt to ascertain how much they believe a business is worth on a relative risk basis. Also see Price Earnings Multiple.
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Core Competencies · The main strengths or strategic advantages of a business. Core competencies are the combination of pooled knowledge and technical capacities that allow a business to be competitive in the marketplace. Theoretically, a core competency should allow a company to expand into new end markets as well as provide a significant benefit to customers. It should also be hard for competitors to replicate and it supports the Sustainable Competitive Advantage of the business. Another definition is “the functions or practices that are central to a business. The activity (or activities) that the business believes it does best”. If a business’s core activity is closely aligned with its core competencies it is better placed to achieve competitive advantage.
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Critical Success Factors · are the few key areas of activity in which favourable results are absolutely necessary for a business (or manager) to successfully reach its / his objectives & goals. They are usually a product of a SWOT analysis which should be used to identify strengths & weaknesses etc based firstly only on hard evidence & secondly only on their importance in delivering customer value.
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Demand Forecast · Together with the sales forecast, it is the most important aspect of a Business Plan (after the quality, appropriateness and experience of key personnel). The sales forecast drives all other variables of the business plan, which ultimately drives success. A well thought out and disciplined demand forecast is a very effective planning tool, and produces a very different outcome, than do less structured ways of thinking about sales. It seeks to understand and quantify the drivers behind demand – and ultimately sales. Simplistically, and too often, a lack of discipline results in “we only have achieve a target of 1 % of the market and we will make millions”…. and that becomes the extent of the forecasting because it “appears” intuitively feasible. The % approach reflects bad management.
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Discount for Minority Interest · An amount or percentage deducted from the per share value of a minority interest voting share to reflect the absence of control.
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Earnout · A contractual provision stating that the seller of a business is to obtain additional future compensation based on the business achieving certain agreed future financial goals. The financial goals are usually stated as a percentage of gross sales or earnings. eg Say an entrepreneur selling a business is asking $2,000,000 based on projected earnings, but the buyer is willing to pay only $1,000,000 based on a mix of actual net realisable assets, historical performance and / or expected future earnings etc. An earnout provision structures the deal so that the entrepreneur receives more than the buyer’s offer only if the business achieves a certain level of earnings. The exact numbers would depend upon the business, but in this example a simplified provision might set the purchase price at $1,000,000 plus 5% of gross sales over the next three years. The earnout thereby helps eliminate uncertainty for the buyer.
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Execution · is what is done to deliver on or coordinate a business strategy, objectives & goals. Although execution is more about doing than thinking, it is still critical, as poor execution will prevent you from delivering on the strategy that will achieve your objectives & goals. Most businesses fail because of poor execution (planning, leading, organising & controlling), not poor strategy.
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Fair Market Value · The price that would be negotiated in an open market between a knowledgeable, willing but not too anxious buyer and a knowledgeable, willing but not too anxious seller dealing at arm’s length within a reasonable time frame.
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Going Concern · is a business that functions without the threat of liquidation for the foreseeable future, usually regarded as at least within 12 months, and beyond. It implies for the business the basic declaration of intention to keep running its activities at least for the next year, which is a basic assumption to prepare financial statements. Hence, the declaration of going concern means that the entity has neither the intention nor the need, to liquidate or curtail materially the scale of its operations.
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Industry Roll Up · Where a company or group of companies acquire, merge etc with like businesses (with similar operations) in a fragmented industry to protect themselves (or create dramatic growth) through increasing market dominance or other economies of scale.
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Key Differentiators and Unique Selling Points · Unique attributes that differentiate a business from its rivals. A business should leverage the key differentiators in order to achieve its Competitive Advantage.
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Key Driver · Anything that could materially affect either a company’s earnings or its value. Every company will have its own unique drivers, although some of the most common drivers include:
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A new product |
New financing |
Commodity or |
Activities of |
| Prospects of a particular division of a company |
Legislation | Litigation |
Key Personnel |
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Price/Earnings Multiple (P/E) · The price of a share of stock divided by its earnings per share. A high P/E can mean a share is overpriced, or buyers believe at that price (relative to its earnings & potential earnings) it is a good investment. Also consider Price /Cash Flow & Price / Book Value.
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Product Life Cycle · A concept that describes the different stages of a product from introduction through growth to maturity and decline. Has applications in market forecasting as well as in strategic and tactical planning.
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Relative Value · where simplistically, the asset is valued relative to the ostensible market value (or intrinsic value if available) of similar assets.
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Risk · is defined as the effect of uncertainty on objectives (Australian Standard). The corollary is, all things being equal, the greater the risk, the greater, should be, the potential return. Risk is about the uncertainty of outcomes & results, either desirable or undesirable – it looks to the future.
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Sale Ready · the state of management where the three core business Processes (Strategy, People & Operations) have been optimised so that a business is constantly achieving its mission, vision, objectives & goals. In this regard, if the business’s competitive advantage has not yet played out (or is yet to be overtaken by competitors); the expected growth prospects of a sale ready business are considered desirable by potential buyers of the business. In summary, ideally the business has a clear successful franchise which is scalable.
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Scalability · A characteristic of a business franchise, model system, or function that describes its capability to cope and perform under an increased or expanding workload. A business franchise considered scalable will be able to maintain or even increase its level of performance or efficiency when tested by larger operational demands. Furthermore, a scalable business is one that can maintain or improve profit margins while sales volume increases.
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Surplus Assets · Assets a business holds, but which are not necessary for the “normal” operation of the business, ie they are not contributing to the core income-generating activities of the business.
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Sustainable Competitive Advantage · a combination of special / unique attributes, product, skills, experience, business size, knowledge & other barriers to entry etc. allowing your business to continuously outperform your competitors over the short, medium & longer term (thus achieving its Mission, Vision, Objectives & Goals). In this regard, Jack Welsh says short, medium & longer term success should be managed simultaneously, without one time period compromising the other.
A Sustainable Competitive Advantage must by definition have continued life (be sustainable), and the competition must find it very difficult to emulate. Consider Blue Ocean v’ Red Ocean Strategies. It is the basis of the true value of a business and is what a buyer of a business will ultimately want to acquire. The price paid for a business will largely be a function of the perceived Sustainable Competitive Advantage.
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SWOT Analysis · A simple and effective technique that analyses a business’s Strengths, Weaknesses, Opportunities and Threats (leading to establishing “actionable” Critical Success Factors). Used in Strategic Planning, however with a tendency of over use. Two principles are important when using a SWOT analysis; firstly analysis should be based only on hard facts, & secondly, components should only be included if they are important to delivering customer value. Long lists of components are otherwise irrelevant & dilute the effect of this important tool.
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Valuation Approach & Methodology (see Business Valuation) · To determine a fair market value of a business (at a given point in time), three fundamental approaches exist. Based on either Intrinsic Value or Relative Value (the foundation concepts underpinning all valuations) they are;
1. The Asset Approach
2. The Market Approach &..
3. The Income (or cash) Approach
These approaches may employ the following techniques;
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Discounted cash flow |
Capitalization of |
Net asset |
Net realizable |
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Replacement |
Liquidation |
Capitalization of |
Return on |
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Industry rule of |
Comparable market |
Cost to create |
Excess earnings |
Value Proposition · a promise of a “defined value” to be delivered by the supplier and acknowledgement and belief from the customer that value is appealing and experienced. A value proposition can apply to the entire business, or parts thereof, including customer accounts, products or services etc.
Creating a value proposition is a part of business strategy. Kaplan and Norton say “Strategy is based on a differentiated customer value proposition. Satisfying customers is the source of a sustainable value creation.”
Developing a value proposition is based on a review and analysis of the benefits, costs and value that an organization (or product) can deliver to customers, prospective customers, and other constituent groups both within and outside the organization. It is also a positioning of value, where Value = Benefits – Cost (cost includes Economic Risk)