Ep. 131 — Ken Sanginario: Why Company Specific Risk Decides What Your Business Is Worth

6 min read

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Episode Summary

You’ve heard multiples tossed around at the peer group meeting and you’ve quietly wondered how anyone actually knows. 5x EBITDA. 7x. 4.5x. Pick a number. Your CPA can run a valuation when you need one for the estate plan or the buy-sell, and the report sits in a drawer. Nobody’s sitting at the chart with you explaining why your company is worth what it’s worth, or what you’d have to change to move the number. Ken Sanginario is back on the show for round two. He’s the guy who built the Value Opportunity Profile and the Certified Value Growth Advisor program (I went through the certification last December). We got into the three valuation approaches and why only the income approach actually holds up. Why company specific risk is the single biggest lever on your value and gets the least training in the industry. The eight functional categories every company has to have built and in balance, and why owners pour their time into the area they’re already strongest in. And the brutal stat that 80% of companies that try to go to market get turned away at the door.

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## Top 10 Takeaways
  1. Three valuation approaches exist (asset, market, income), and only the income approach can be properly defended.
  2. Your value equals the future cash flows you can generate, not what you paid for the assets.
  3. Sustainable, predictable, transferable. Miss one of those three on your cash flows and your multiple collapses.
  4. Company specific risk is the single biggest lever on valuation and the one nobody trains you on.
  5. Eight functional categories have to be built and balanced (planning, leadership, sales, marketing, people, operations, finance, legal).
  6. You over-invest where you’re already strong and under-invest where you’re weak. The weakness is the constraint.
  7. Higher quality means lower risk means lower cost of capital means higher value.
  8. Public companies have analysts, the SEC, boards, and auditors holding their risk down. You have nobody.
  9. Intrinsic value is what a financial buyer pays. Transaction value adds what a strategic buyer captures from the combination.
  10. If you only build quality to prepare for a sale, you’ll never close on terms you’d actually accept.

Sound Bites

“If you think about a company being a collection of its individual assets, a company’s value basically is the value of the cash flows that that company can generate in the future.” (@00:23:32) — Ken Sanginario

“Most companies are strongest in the functional categories that reflect the background of the owner or CEO of the company. But when we ask where they’re investing all of their time and energy and resources to grow and expand the company, they’re putting it all in the areas where they’re already strongest. It’s not getting them one dime of incremental value.” (@00:36:13) — Ken Sanginario

“Private companies don’t have any of that outside independent oversight, so they ignore all of these company specific risk factors. And those factors come home to roost when these owners decide they want to go sell their companies.” (@00:53:54) — Ken Sanginario

“You want to run your company at the highest quality you possibly can at all times. You don’t want to start improving the quality only to prepare for a sale, because then you may never get to the sale transaction.” (@01:11:13) — Ken Sanginario

“I’ve had many turnaround clients over the years, a year and a half, two years into a turnaround, when they say to me, I cannot believe what we were doing in our company before this turnaround process. I can’t believe what we were doing and what we weren’t doing.” (@01:12:46) — Ken Sanginario

About This Episode

Ken Sanginario is the founder of Corporate Value Metrics and the architect of the Value Opportunity Profile (VOP), a software platform that systematizes business valuation and value-growth advisory for the lower middle market. He’s a CPA, CTP (certified turnaround practitioner), CVA, ABV, and CM&AA, with master’s degrees in taxation and finance. After 19 years of turnaround consulting and m&a work in the lower middle market, he built the VOP to tie due diligence directly to valuation so privately-held companies could see what’s actually constraining their value. This is his second appearance on the show. Ryan went through Ken’s Certified Value Growth Advisor (CVGA) certification in December 2018 and uses the VOP framework in his client work.

Resources Mentioned

  • Corporate Value Metrics — Ken’s firm and the home of the Value Opportunity Profile and CVGA program. — corporatevalue.net
  • Value Opportunity Profile (VOP) — Ken’s software platform that ties qualitative risk assessment directly to company valuation.
  • Certified Value Growth Advisor (CVGA) — Ken’s five-day training and certification program for advisors.
  • Peter Christman — Referenced as one of the “Godfathers” of the exit planning industry; his research found 70% of lower middle market companies are owned by baby boomers.
  • Pepperdine University Private Capital Markets research — Referenced for the ~40% transaction failure rate when private companies try to go to market.
  • Alliance of Merger and Acquisition Advisors (AM&AA) — Referenced for industry research on lower middle market transactions.

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