Full Value Math to Mindset Post

The last project that I worked on with my father at the family’s construction business was a formal third-party valuation so the business could be sold. In the valuation process I learned there are mathematical formulas that find the value of a company, any company. This was exciting news to a finance construction nerd. 

I was excited to learn there were formulas that could be reversed engineered to maximize ROI, ROE, and wealth creation. It seemed logical to me that everyone once they understood these formulas would take steps to correctly implement the business structure needed to create the highest economic output needed to create and maximize full economic value. 

Applied finance is rooted in math but is greatly influenced by human feelings toward risk. Recognizing these human feelings toward risk leads some people to say finance is part math and part art. The art is applying human risk variables to mathematical formulas and constructs. 

I missed the “true art” of valuation formulas for many years. I thought the art was risk-based adjustments. The “true art” of valuation formulas is the mindset of a company’s ownership. The mindset of a company’s ownership figures out how quickly and efficiently barriers to maximizing full value are removed, or in too many cases if they are removed.

Characteristics of a Full Value Mindset

• Ownership maintains a clear goal of achieving full value as defined by ownership. 

• Ownership never settles for achieving less than full value due to a mental or business set back or barrier. 

• Ownership does not change the goal of achieving full value when obstacles are difficult or outside their current skills or knowledge base.

• Ownership is willing to learn or acquire the necessary skills or knowledge. 

• Ownership is able to make necessary adjustments to full value goals made necessary by evolving market conditions. 

• Ownership is able to operate within and teach a consistent execution based culture necessary to achieve full value.

• Ownership is able to build an organization that can continue to survive and prosper without ownership being required to consistently manage day-to-day operations. 

• Ownership becomes the gold standard example of leadership, mentorship, and improvement. Leadership cannot have a “do as I say, not as I do” attitude.

When I decided to leave the family business, I was approached to join a management consulting firm heavily focused on commercial construction companies. An offer that I heavily considered. To be honest, I didn’t take the offer because all my friends and peers that owned contracting companies used the firm constantly complained about the consulting firm’s fees and the processes they implemented but didn’t always feel necessary. What I missed was that they were still using the consulting firm!!!

After 20 years had passed, I had my first clue that I had missed something. All the construction companies that had been complaining about the high fees were winning. Their signs could be seen on every construction site across a major metropolitan area. Most of the contractors had grown from $10M per year in revenue plus or minus to $150M to $300M a year in revenue. 

Many of the firms that didn’t see the value in the consulting fees didn’t seem to be around or if they were, they were not visible. 

It took me a while to understand the difference between these two groups of contractors. The difference is mindset. 

One group understood and embraced improving requires an investment in time and money on faith while accepting they will need to be personally and professionally uncomfortable and vulnerable in order to win and grow. The other group was unwilling to invest without a clear guaranteed outcome and was unwilling to experience challenging personal and professional growing pains. 

The latter group is easy to spot. They will tell you they agree with what you are saying but will believe and state that sound business practices do not apply to their business because it is a one-off unicorn. FYI, one-off unicorns are incredibly hard to manage, never achieve full value, and are almost impossible to sell. 

Over the past few decades, I can count on two hands the number of construction companies I have seen sold for full value. The construction companies sold for full value were either sold to an ESOP or a larger consolidator. I cannot think of one that didn’t rely heavily on consultants and peer groups. 

I was picking the brain of a friend that sold his company at full value a couple of years ago. He told me that he didn’t feel they would have sold at full value without the knowledge learned from consultants. He told me that he struggled paying consultants for years until he realized he was really paying for the best practices of his competitors!!!