An equation for valuation

Mary Bitti has a good article in The National Post. Read online.
Armada Data Corp. is a bright spot in the auto industry. With car sales down 15% to 20% in the past three months and GM and Chrysler continuing their downward slide, Mississauga, Ont.-based Armada Data is enjoying a 40% to 50% jump in sales and a doubling of market share, and it has plans to expand through acquisition.
In its 10th year, the company listed on the TSX Venture Exchange in Vancouver, gathers new car pricing data and sells the information directly to new car buyers via Car Cost Canada.
"We help consumers save money by giving them the information they need to negotiate a better price," says Paul Timoteo, president of Armada Data. "In these times, people are shopping around more. The more research they do, the more they see the value in our service. We've seen a huge spike in sales in the past six months."
Strong sales plus a debt-free balance sheet have placed Armada Data in shopping mode, and it is now looking at potential acquisitions. "When it comes to assessing value, I know what to look for," Mr. Timoteo says.
Namely: the company's ability to grow; its market share; its rate of growth; its history of profitability, current profitability and potential for future profitability; and its debt load. That's the financial side. Then there are the less tangible questions such as: How uniquely is it positioned in the marketplace? Who are its competitors? How does it compare to those competitors? What kind of marketing initiatives is it involved in? How do consumers and investors look at the company?
"If your company is profitable, typically the market says your company is worth anywhere from five to 10 times its annual profit," Mr. Timoteo says.
"That said, if we feel that merging a company with ours will disproportionately increase the value of our company, I may be prepared to pay more than it's theoretically worth because I know together we'll grow faster than either of us would have on our own."
That is why Jacoline Loewen of corporate finance firm Loewen & Partners and author of Money Magnet: How to Attract Investors to your Business, describes valuation as an art not a science. "It's expectations. How you sell yourself is huge," she says.
"It's about a lot more than money. Sales revenues give you enormous credibility but many companies get investment without any revenues. Angels will want to help because they like you and your business. At the end of the day you have to be able to stand by your valuation, build a case for the amount of time you've put in, the goodwill of your brand, your intellectual property," Ms. Loewen says.
How you choose to build that case may take different approaches says Steve Gedeon, professor of entrepreneurship at Ryerson University's Ted Rogers School of Management.
"There are essentially three reasons an entrepreneur would put a value on their business: To attract investment or if you are selling shares or selling the entire company; in the event of divorce or for estate-planning purposes; or if you want to offer employees stock options," he says.
"There are many different ways to go about placing a value on the business. The valuation method you choose is the starting point for negotiation. Ultimately, a company is only worth what someone is willing to pay for it."
Mr. Gedeon outlines three approaches to business valuation:
-Discounted cash flow, which is the net present value of all future profits of the company. "The trouble, of course, is nobody knows what the future will hold," Mr. Gedeon says.
-Similar company transaction, where basically, you adopt the known price someone was willing to pay for a company like yours.
-Replacement method, which pegs value at the cost to recreate the company.
When it comes to startups a rule of thumb applies: "Early stage businesses that don't have revenue will never be worth more than $2-million," Ms. Loewen says.
To build value, Mr. Gedeon, shares this rule of thumb: "The larger your profits and the more stable they are, the higher the valuation. How do you build stability? Diversify your client base and increase your differentiation in the market."
For Mr. Timoteo, the key to being profitable is simple: "Either increase revenue or lower your expenses. If you can do both you're in good shape."
The National Angel Capital Organizations' Best Practices Guide for Angel Groups and Investors ( angelinvestor.ca/Best_Practices.asp)has a detailed review of valuation methods.

Kevin O'Leary hates private equity

Kevin O’Leary says that he hates private equity – he threw out this comment on Twitter (I am enjoying his tweets). In actual fact, with Kevin's trademark honesty, he hits on the truth.
I can get Kevin’s pain.
Private equity investing ain't for most investors because most people only want to give their money out for a year, and then they want to get it back.

Private equity’s horizon is a far longer arc so there's your first hurdle.

Then investors used to public markets want to be passive investors, putting in money but nothing else. According to his Twitter tweets, Kevin wants to sit on his dock in Muskoka, sipping wine, deciding whether to BBQ ribs or not, and collecting interest on his investments.

Quite right, Kev...don't we all?
Private equity is not the usual asset class or public market vehicle you can pick up or drop overnight. It is for the long term. For investors like Kevin who likes to have his money come home to visit Daddy once in a while, private equity (with its five year investment horizon) is simply too long term.

Yes, I hear you saying that the returns on the initial lump investment will be larger than the public market returns, but private equity investors also put a great deal of effort into building the business too (not as much time for the wine sipping and BBQing). For investors who do not know how to do strategy with the company management team, or do not want to attend board meetings or pick up the phone and help sales – leave private equity alone. You will only get more burnt than Kevin O'Leary's BBQ ribs.
O’Leary’s right – private equity is hard. Funny thing though, I think Kevin would be a great private equity investor as owners would appreciate his candour, his rolodex, his big vision and his energy. Now, with all this talk about ribs, I'm going for lunch.

How far do you go to invest?

How far from your office should you go to invest in companies? Would you be only interested in twenty clicks of Toronto or will you look past the Southern Ontario iron curtain?
Financial gurus are bellowing that the next twenty years growth will be in BRIC countries. "You need to move on to richer, more verdant pastures!" How will this play out for private equity?
Where to find growth is a pressing question and it is a difficult challenge for small PE firms. How will these Canadian private equity experts invest? Will it be directly into Indian and Chinese companies? The more likely scenario is to invest in Canadian companies doing business with BRIC countries?
I do know that the equity partners within a few hours drive are more likely to consistently show up to the Board meetings, contribute and even drive the strategy, get people into the office on Mondays to drive the action and generally make themselves very useful.
If the PE firm can do all of that even if far away, then terrific.
Here's Carried Interest chatting about his investment in an Australian company and they challenges he is learning about - including the language. Turns out that even though they speak English, "S'tralian has to be translated a bit. Read more...

Do this with your family

Do you remember a particular tree from your summers past? Is there a tree your family gathers beneath and has shared history with you? Here's your chance to do something with your family this summer.

A province-wide program to identify trees across the province with stories was announced today by Trees Ontario. The Heritage Tree program celebrates those trees that have cultural or historical significance to the community or province.
Heritage Trees could be those around which a community has held an annual picnic for the past 100 years, the tree that was planted to commemorate a coronation or other important international event, a tree that was planted to celebrate the life of a soldier or one in an historically designated neighbourhood. The trees should be part of the fabric of that community.
Anyone can nominate a tree by registering on the Trees Ontario Heritage Tree web site (http://www.blogger.com/www.heritagetrees.on.ca). A nominated tree is evaluated by a Trees Ontario representative based on the following characteristics: its historical and cultural importance to local and broader community; rarity of species; prominence based on size and age; aesthetics and/or artistic peculiarity; and its physical conditions and expected longevity. The evaluation criteria can be found on the Heritage Tree web site.
If the tree meets the above criteria, it will be placed into the Heritage Trees online database. If identified as a Heritage Tree it will also be recognized with a certificate.
A Heritage Tree is usually more than 70 years old. What sets them apart is the important cultural and historical significance they represent. “If these trees could talk, they could provide an intriguing history lesson about the people and land around which they are rooted,” said Michael G. Scott, President and CEO, Trees Ontario. “For the communities and people that enjoy, celebrate and nurture these green giants, they are a source of pride, full of rich memories and stories that they can now share.”
The Ontario Urban Forest Council’s (OUFC) Heritage Tree Toolkit formed the basis for the Trees Ontario Heritage Tree program. “The toolkit was developed in response to the public’s interest in identifying heritage trees in the community,” said Jack Radecki, Executive Director, OUFC. “OUFC is thrilled to be working with Trees Ontario to launch the online provincial program.”
“We are pleased to be working with OUFC to extend their Heritage Tree Toolkit into a province-wide program available to the public,” Scott continued. “We look forward to receiving nominations from across the province and to reading wonderful stories about important trees in our province.”
Trees Ontario has already begun working with other agencies to identify some trees that could be nominated. These are currently under review by Trees Ontario representatives and include trees from Aylmer, Cataraqui, Collingwood, Prince Edward County and Toronto.
Another important aspect of this program is the opportunity to collect seeds from recognized, native Heritage Trees, thus ensuring that the tree’s seeds live on. Trees Ontario plans to work with local communities to locate and collect these seeds. Growing trees from native seeds is important as those species have adapted to the regional environment over thousands of years and are more likely to survive.
For more information on Trees Ontario and the Heritage Tree Program, visit http://www.blogger.com/www.heritagetrees.on.ca.

Jack Welch gets into videos.

Listening to business leaders is a great way to leap frog your own company, and the business podcasts on iTunes are one way to get access to the best business minds in the world.
One of my favourite podcasts is Jack and Suzy Welch, listed under BusinessWeek. Each week, Jack riffs about business, with Suzy pushing for clarification. It's a great listen. Jack is now starting his online university and all I can say, this is the new way of education.
Here is the next level of Jack and Suzy's show.
RT @jack_welch: Web show- It’s Everybody’s Business (with Microsoft) View it here. http://bit.ly/6dCCF