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Sunday, August 05, 2007

Cost of hurry

As most of my getting-to-know meetings go, this one with the CEO of a growth stage firm (Revenues $5 m) few weeks back had its share of insights. Despite having a robust business, revenues growing 25% and profits by 15% post tax, he was getting a raw deal from VCs.

He had then offered me if I could take a fresh look at his business and get a better offer, the deal’s mine. As deals go, you can’t be sure of what value VCs will offer to a business. But the darned thing is that, it’s pretty much what I do for a living – getting entrepreneurs and VCs to arrive at a consensus on team caliber, value creation, growth prospects, robustness and finally, valuation. In his case, I had no doubt about the first four aspects. The chops were getting bust on valuation. One look at his valuation sheet confirmed my early suspicion - valuation of intangibles.
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Because businesses are often worth far more than the sum of their hard assets and working capital, I devote a lot of attention identifying and assigning value to intangible assets. These assets must be valued for their residual life to assess entity value in addition to that of real estate and equipment. It calls for minute verification and cross referencing, which many established investment banks overlook since it takes more time on due diligence. Instead, they put a lumpsum value and close books – in a hurry so that they can move on to the next deal.

In this case - among the various types of intangible assets to which I had assigned value were: (a) Patents, copyrights and licenses (b) Customer lists and relationships (c) Non-compete agreements (d) Favorable financing (e) Software (f) Trained and assembled workforces (g) Contracts (h) Leasehold interests (i) Unpatented proprietary technology (j) In-process R&D (k) Databases (l) Trademarks/tradenames Intangible assets such as brands, intellectual property and licenses - that now comprised a greater percentage of the economic value of his business. To me, these intangibles represent the main performance drivers in the current transition from a traditional financial economic structure to a new knowledge-based economy. No arguments.

I had sweated a lot for what I got. But in the end, we both felt glad. Joy of incremental valuation that was up by 45% - on a conservative estimate ! My client was itching to go after the investment bank that had cost him a bomb for the job they did. I gave him an expression of nonchalance. Stay tuned for more, I’ll be back soon after the expiry of silent period in a VC deal that we are currently pursuing.
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