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Episode Summary
You don’t actually know what your business is worth right now. You won’t know until somebody writes you a check. And in the meantime, every operating decision you make is happening blind to the one question that matters: am I growing this asset or bleeding it? Dr. Craig Everett runs the Pepperdine Private Capital Markets Project, the study I keep pointing people to because nothing else gives owner-operators a real window into how private capital actually prices risk. We got into why most owners say their cost of capital is zero (and why that answer guarantees bad decisions for years), how the WACC actually drives the multiple a buyer puts on your business, why dry powder is distorting valuations right now, and the spread between what your cash flow can defend on its own and what a strategic buyer backed by private equity money will overpay for. Real talk on ESOPs, equity recaps, and the IPO-vs-private-equity question owners are answering very differently than they did ten years ago.
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## Top 10 Takeaways- If your ROI beats your cost of capital, you’re building value. If it doesn’t, you’re bleeding it.
- Saying your cost of capital is zero just means you don’t see your own equity as an asset.
- Your equity has an opportunity cost: 10% in the S&P 500, with way less risk than your business.
- A private business carries idiosyncratic risk, so your real equity cost of capital is closer to 25%, not 10%.
- Every multiple sits on top of a discounted cash flow. The multiple is a shortcut, not magic.
- Lifestyle businesses minimize taxes by minimizing profit. Sale-ready businesses maximize profit. You can’t optimize for both.
- The buildup method’s company-specific risk premium is a fudge factor that backs into whatever answer you want.
- Dry powder is forcing PE firms to overpay, which is why private equity now outprices strategic and IPO exits.
- There are two different values: what your cash flow can defend, and what a strategic buyer will pay above that.
- You can engineer the cash flow value. The strategic premium is mostly out of your hands.
Sound Bites
“If your company’s ROI, return on investment, is greater than your cost of capital, you’re growing your company, the valuation is becoming larger. If your ROI is less than your cost of capital, then you’re bleeding value.” (@00:14:23) — Dr. Craig Everett
“We ask private business owners, what’s your cost of capital? It’s amazing how many people will say zero.” (@00:16:09) — Dr. Craig Everett
“My dad, his goal with his business wasn’t necessarily the value of the company. It was maximizing his own personal wealth.” (@00:19:14) — Dr. Craig Everett
“What we call intrinsic financial value: here’s the risk of the cash flow and the value associated with it. And over here we call it strategic transaction value, that one point in time where the company switched hands for a variety of reasons that are above and beyond the risk of the cash flow.” (@00:50:45) — Ryan Tansom
“Private equity firms are just grotesquely overpaying for companies because of the competition. Your best bet right now is selling to a private equity fund.” (@00:55:06) — Dr. Craig Everett
About This Episode
Dr. Craig Everett is a finance professor at Pepperdine Graziadio Business School and director of the Pepperdine Private Capital Markets Project, the most comprehensive ongoing survey of how private capital actually prices risk for owner-operators. He took over the project in 2012 from founder John Paglia, after a career at Northrop Grumman and several startups, an MBA, and a PhD from Purdue. He also directs Pepperdine’s Most Fundable Companies competition. This episode is the primary iBD reference for cost of capital, WACC, and how multiples actually get built in the private markets, which sit at the foundation of Owner’s Value, Market Value, and Transaction Value.
Resources Mentioned
- Pepperdine Private Capital Markets Project — Free archive of all prior years; current year report is a small fee. — privatecap.org
- Pepperdine Most Fundable Companies Competition — Craig’s other Pepperdine program, helping entrepreneurs learn what investors are looking for.
- Ken Sanginario / Value Opportunity Profile — Referenced as the mutual friend who introduced Ryan to Craig’s work, and the source of the eight functional areas framework Ryan uses to teach company-specific risk.
- Craig Everett on LinkedIn — Handle: Craig Everett
- Email — craig.everett@pepperdine.edu
Connections
Phase + Module:
- Module 2 — Expand Knowledge — Building the financial fluency to read your business like an investor would
- Module 4 — Sustainable Financials — Where the discounted cash flow underneath every multiple actually lives
Milestones:
- Milestone 4 — Owner’s Value (DCF) — The DCF view of your business value, which is what cost of capital actually discounts
- Milestone 5 — Market Value — The intrinsic financial value the cash flow can defend on its own
- Milestone 6 — Transaction Value — The strategic premium a third-party buyer will pay above market value
- Milestone 7 — Value Growth Plan — How you actually move the cash flow value up over time
Concepts referenced:
- Weighted Average Cost of Capital (WACC) — The blended cost of equity and debt that drives valuation
- The Multiple & WACC — Why the multiple is just a shortcut for a DCF, and what bends it
- Three Lenses of Value — Owner’s value, market value, transaction value as three distinct numbers
- Value Gap — The space between what you think it’s worth and what the market will actually pay
- Enterprise Value vs. Equity Value — The vocabulary investors use when they’re pricing your business
- Normalized EBITDA — The profit number a buyer is actually multiplying
- Free Cash Flow — What discounted cash flow analysis is actually discounting