It was the end of a well-received dramatic performance last Saturday night, and the audience responded with appreciative applause. The four actors came out one at a time, took their curtain call, and then joined hands for a collective bow. A man in the second row rose, applauding enthusiastically, and one by one people joined him to a point at which most of the audience was acknowledging their approval with a standing ovation.

“It was good, but I didn’t think it was worth a standing O,” said my artistically discerning wife, belatedly getting up to put her sweater on.

“Well, clearly we were in the minority,” I responded, looking around at obviously-pleased fellow theatre-goers.

“Grade inflation,” I thought to myself. “The real assessment was that it didn’t get a second curtain call.”

I chalked up my tepid reaction to some important pending client issues, to my preoccupation with national politics, and to my interest in the New England Patriots’ drive for Super Bowl perfection the next day (ill-fated, as it turned out).

A couple of days later, I happened to run into a long-time patron and former director of the theatre company. “It had all the signs of a real winner when we scheduled it,” she said of the play, ” but it just didn’t hit our market right. We ended up papering the house for the last few nights.”

That wasn’t what it looked like from the outside.

Fortunately, the bottom line for this theatre company is artistic, not financial. There are no shareholders calculating their ROI. But artistry alone doesn’t usually command big returns in the business valuation process – it’s how that artistry, or creativity, or innovation, or unique solution gets assessed in the market that makes the difference. Too often, discordant notes like the following limit the size and interest of the audience of potential investors or acquirers and, ultimately, your company’s value:

1. The 3% Return – doesn’t cut it. Your salvation may be a synergistic buyer who can reduce a lot of your overhead and thus improve your profit margin [see Bites, below], but that buyer is unlikely to pay you for the benefit of what he or she brings to the table.

2. A Limited Market – limits your reward. Without your having a Big Solution to a Big Problem that is shared by many people or businesses and evidenced by market research, there’s not a lot of attraction to financing your effort to scale up.

3. Me, Too – means you’re a follower. Something has to be unique. If it’s not proprietary, if you lack intellectual property (copyrights, patents), you need demonstrably better marketing, or higher quality, or a lower price, or better service, or brand equity – something that creates a measureable difference from the competition.

4. It’s Here Somewhere – leaves you nowhere. The investor asks: How much money do you need? What will you do with it? What happened to the last round of funding? Answer those questions without reference to notes, or don’t bother to schedule the appointment.

5. The Accountant Is Working on Them – is the wrong answer to the request for financial statements. Your CFO can provide the details, but you – the owner – must know the key elements of the model and account for year-to-year variances as you lay out the financial results.

6. We Actually Did Better Than That – is always met with skepticism. Was your bottom line reduced by disproportionate bonuses or by a profit share? By cars or other perqs for you and your spouse? By revenue rolled forward to postpone taxes? Prepare a pro forma financial statement to reveal the adjusted bottom line without your tax tactics and other, one-time, expenses.

7. We’re a C Corporation – means that you may be taxed twice on the gains from your company’s sale, substantially reducing your proceeds. If you have no institutional investors to limit your options, consider the advantages of being an S Corporation. It can take 10 years to unravel the C Corp bind – don’t wait.

8. Our Financial History Is All In Our Tax Returns – reflects unsophisticated financial management. A big step in establishing credibility with a buyer or investor comes from having consistent outside involvement in your financial reporting, at least annually. Trust is critical: start with a year-end CPA Review that conforms to GAAP.

9. Our Bank Financing Is All On Credit Cards – indicates that you’re a marginal corporate credit risk and likely overpaying on interest rates. Alternatively, establishing a corporate credit line is recognition that you have achieved a higher level of credit worthiness and fiscal responsibility, important to vendors and customers alike.

10. What Budget? – means that you’re trying to navigate the Swamp in the dark without a light. Financial people – the kind who might invest in you – want evidence that you manage to a plan and that achieving your bottom line is the result of a conscious, coordinated effort.

True harmony comes from being able to orchestrate all of these elements when a potential buyer comes knocking. It’s then that the Fat Lady will accompany you – on key – all the way to the bank.

Alligator Bites

Sometimes a potential buyer doesn’t bother to knock…

“Microsoft’s unsolicited $44.6 billion bid for Yahoo last week certainly wasn’t the first bear hug in this bear market nor will it be the last. According to press reports, Steve “the embalmer” Ballmer called Yahoo CEO Jerry Yang with the good news on Thursday evening. The irresistibility of the 62 percent premium the Yahoo board must now contemplate is tempered by the fact that the bid is 15 percent below Yahoo’s recent high. Analysts, busy dissecting the deal which comes at a whopping 23 times EBITDA, have convinced themselves that after the $1 billion savings from “synergies” (read: they fire about 6,500 staffers), it drops to a less whopping 13 times. That’s not all. Yahoo has off-balance sheet assets in Yahoo Japan and Alibaba.com which may be worth $10 per share, or $13 billion. Add that to the $2.4 billion cash balance and the deal is, according to some, a steal. Or not…

“…any M&A deal of this magnitude (or any magnitude for that matter) will live or die on the cultural fit. Yahoo is a unique culture inspired by founders Yang and Filo. In the hip world of the Internet, Microsoft has always been the stodgy evil empire, snuffing out young competitors and buying up unique technologies for its exclusive use. How will the Yahoo culture react to 6,500 pink slips FedEx-ed from Darth Vader of the north? According to Google Maps, 701 First Ave. in Sunnyvale, Calif., is only 5.5 miles from 1600 Amphitheatre Rd. in Mountain View. If this deal gets done, won’t the best and the brightest at Yahoo find a welcome home a short drive away at Google? That would be the ultimate deal irony – Google gets Yahoo (talent) for free.”

– Jim Anderson, Investment Strategy Outlook, February 4, 2008

Draining the Swamp

Sobering Statistics:

“With guaranteed pensions rapidly becoming a thing of the past, 401(k) savings will be all many workers have when they reach retirement, aside from a Social Security benefit. But utilization and savings rates continue to lag far behind where they need to be to replace employees’ incomes. Fidelity Investments, the 401(k) behemoth, provides the following statistics about the 10.1 million participants in its plans in 2006.

$66,500 – Average account balance

63.1% – Average plan participation rate

7.0% – Average percentage of salary invested by participants

20% – Percent of participants invested 100% in their plan’s default option*

$78,800 – Average compensation of plan participants”

– Quoted in CFO magazine, December, 2007

*According to the Department of Labor, qualified long-term default options for employees are limited to just three: lifecycle funds, balanced funds, and professionally managed accounts.