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On the Evolution of Work Systems in the Digital Economy

Tag Archives: Business

Estimating WACC for Private Company Valuation: A Tutorial

This post was written by David Turney, Finance Expert for Toptal.

Submitted by Michelle Young at Toptal

Edited by Lynn Patra

Executive Summary

Common Roadblocks in Estimating Private Company Discount Rates and How to Overcome Them
Discount Rate Estimation of a Privately-Held Company – Quick Example
Why Would You Need a Discount Rate for Private Company Valuation?

Introduction

Nowadays, an increasing number of companies are opting to stay private for longer, bypassing regulations and public stakeholders. While the total number of US companies continues to grow, the number of those traded on stock exchanges has fallen 45% since peaking 20 years ago. As reported by The Economist in 2017, the number of publicly listed companies was 3,671, down from 7,322 in 1996. Thus, private company valuation has risen to the forefront, especially since it is required for anything from potential acquisitions to corporate restructuring and financial reporting. Understanding how discount rates are estimated and their role in financial decisions is important to both private business owners/operators and investors/valuation professionals. Unlike public company valuation, private company valuation often lacks publicly available data. However, both types of valuation have something in common: usage of the discounted cash flow (DCF) analysis, which requires (1) estimation of future cash flows and (2) a discount rate.

This article focuses on best practices for estimating private company discount rates, or the weighted average cost of capital (WACC), drawing on my 12 years of experience performing private company valuations and various editions of Cost of Capital: Applications and Examples. The discussion begins with an overview of the DCF analysis and the WACC, followed by detailed instruction around the components of the WACC. While this article will cover WACC as taught in accounting classes and the CFA program, it will also demonstrate how best to handle challenges encountered in practice. Perhaps unsurprisingly, a lot of classroom rules break down in the real world. And, since variables for estimating WACC are not simply pulled from a database, much analysis and judgment is required. Read more of this post

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Private Equity Succession Planning Do’s and Don’ts

Submitted by Michelle Young at Toptal

Authored by Melissa Lin, Finance Editor at Toptal

Edited by Lynn Patra

Executive Summary

Private Equity Succession Planning: Portfolio Companies
Don’ts in Private Equity Succession Planning for Portfolio Companies
Do’s in Private Equity Succession Planning for Portfolio Companies
Succession Planning for Private Equity Firms Themselves

Introduction

While growing investor enthusiasm has contributed to a flood of capital (a historic $3 trillion over the last five years), the private equity industry faces increasing competition among PE firms, record-high multiples, and other factors making it difficult for them to generate attractive returns. One aspect for consideration is succession planning, especially since CEO turnover at portfolio companies occurs at a rate of 73% and has been shown to increase hold time and decrease returns. While succession planning is undoubtedly important for the continuity and sustainability of any company, it may be even more true for those in the private equity industry.

This article defines succession planning and examines the best practices and mistakes to avoid in succession planning for PE portfolio companies (beyond just the CEO level). It also explores succession planning within private equity firms themselves, something PE firms have been uncharacteristically proactive about confronting recently.

What Is Succession Planning for Private Equity Portfolio Companies?

Read more of this post

How to Sell on Amazon [Infographic]

Submitted by Jake Rheude, Director of Marketing at Red Stag Fulfillment

Making extra money online and escaping the nine to five grind often becomes possible when you set up a stream of passive income to supplement your regular income. A great way to do this is to sell products on Amazon.

While it can seem daunting at first, it’s best to remember that the people who sell you products on Amazon are largely normal folks. Anyone can sell on Amazon. All they have to do is choose the right product, set up a profile, and find a fulfillment provider.

Red Stag Fulfillment put together a complete guide to selling on Amazon, but for those who are looking for an overview of the process, this is a good place to start.

Getting Set Up on Amazon – First Steps

Read more of this post

Waking Up a Sleeping Industry: Mattress Industry Disruption

Submitted by Michelle Young at Toptal

Authored by Melissa Lin, Finance Editor at Toptal

Edited by Lynn Patra

Executive Summary

The Traditional Mattress Model
Upstarts Grabbing Market Share
Common Mattress Upstart Success Factors:
The Story Isn’t Black and White
Key Takeaways from Mattress Industry Disruption

Introduction

Mattresses are having a cultural moment. Once crammed into stuffy showrooms with eager salespeople and a dizzying plethora of models touting ergonomic springs or gel foams, mattress purchases have long been a notoriously complicated in-store purchase. However, they have recently become—dare I say it?—sexy. A growing number of upstarts have recently revitalized the industry with innovations in marketing, delivery, a direct-to-consumer model, and new mattress technology. According to Jason Bennett, former Senior Director of Marketing for Gap, Inc., “Mattresses are now a cool thing to talk about. You would never have thought that in years past.” You might be scratching your head wondering how regular mattresses—not even “smart” mattresses—have gained renewed popularity in the public eye, but wonder no more.

While the concept of “disruption” has become somewhat trite in today’s evolving tech world, it may just be that these mattress upstarts are shaking up the business and forcing incumbents to adapt. Rather than the typical narrative of shiny, nimble operations displacing older ones, perhaps there’s room for collaboration and innovation. There are lessons for investors, entrepreneurs, and corporate moguls alike. This article discusses the traditional mattress business model, what these upstarts are doing differently (and better), and some takeaways from these developments. Read more of this post

The Statistical Edge: Enhance Your Metrics with the Actuarial Valuation Method

Submitted by Michelle Young at Toptal

Authored by Dani Freidus, Finance Expert for Toptal

Edited by Lynn Patra

Executive Summary

What Is an Actuary?
The Power of the Actuarial Valuation Method
How Can an Actuary Help to Enhance Business Metrics?
How You Can Start to Implement This Now

Beyond Insurance: The Changing Role and Perception of Actuaries

I often hear the question “What is an actuary?” Well, actuaries are unique in that they have a deep understanding of both business and statistics. Traditionally, an actuary’s differentiator was their ability to make financial sense of extremely long-term horizons—typically those associated with the lifespan of human beings. This naturally lent itself to actuaries working in the age-old fields of life insurance and pensions

However, it is not just an actuary’s grasp of the long term which is unique but also their ability to harness a broad range of academic fields and apply them in a business context. To this end, the Actuaries Institute defines actuaries as professionals who: Read more of this post

The Top Management Models That Are Changing How Business Operates [Infographic]

Submitted by Quinn Cooley, Media Manager at at Circa Interactive

Edited by Lynn Patra

North American business leaders have their fingers on the pulse of what it takes to flourish in a constantly changing society. No, it isn’t cutting costs. It is learning how to adapt to change.

The management issue businesses face

While 75% of executives believe that their future success is dependent on their ability to adapt, less than half of them have tried change management programs. And, of the people that have tried to integrate change management programs into their business, only 54% of them feel as though their efforts have been successful.

Clearly, there is a discrepancy between what prevailing wisdom says must be done, and what is actually getting done.

The issue with implementing effective change

Surprisingly, most executives agree that an overhaul on corporate culture is necessary in order for change to effectively occur. While the vast majority of executives agree that it is necessary to consider a company’s culture in order to make effective change, 76% also acknowledge that this was not accomplished in their own change management efforts. Read more of this post

Fintech and Banks: How Can the Banking Industry Respond to the Threat of Disruption?

Submitted by Michelle Young at Toptal

Authored by Alex Graham, Finance Expert for Toptal

Edited by Lynn Patra

Executive Summary

Fintech 1.0 needs fintech 2.0 to arrive.
How have banks reacted to fintech?
There are four areas in which the financial industry can focus to improve their response to fintech.
What will the bank of the future be?

Banks Can Play the Fintech Game Too

Fintech, shortened from financial technology, is assumed to be a modern movement. Yet the use of technology to assist financial services is by no means a new phenomenon. Financial services is an industry that introduced credit cards in the 1950s, internet banking in the 1990s and, since the turn of the millennium, contactless payment technology. Yet, fintech’s place in the public conscience has really taken off in the past three years:

Chart 1: Google Trends "Interest over Time" Results for the Search String "Fintech"

The takeoff of this term has come from startups—actors not within the inner circle of financial services, taking a more prominent role within the ecosystem. Three core trends have led to this movement emerging: Read more of this post

A Quick Status Update & Business Resource Recommendations

Months ago I mentioned that I’d spend this past summer giving a new business venture a go and would report back on how this panned out. It wasn’t meant to be. However, this snag is another chance to learn and problem solve in order to transition to the next opportunity. Despite people telling me that I seem to have everything together, I understand what it’s like to struggle. For now, I’m focused on returning to the workforce, but at least fall season is the ideal time to search I hear.

However, between time spent inside my own head and working on the business, my networking efforts fell to the wayside, and this doesn’t set me up well for finding a job. Personal referrals are the way to go nowadays, what with hiring managers having to sift through piles of resumes. This is, by the way, a familiar problem that some introverts have. Well, I decided to act in accordance to the saying about sometimes having to spend money to make money (and no, I don’t think money is the root of all evil but I’ll return to this thought with my “politics in the workplace, etc.” series next week).

Read more of this post

How to Hire the Right M&A Advisor to Help Sell Your Business

Submitted by Michelle Young at Toptal

Edited by Lynn Patra

It can take around five months to sell a business. It is a significant commitment with many risks, in terms of juggling attention between ongoing operations and negotiating the sale. Enlisting the a professional M&A consultant’s assistance will help a founder to manage time, maintain their business, and maximize the economic outcome of the deal.

To help select an M&A consultant to work with, we will outline the steps of selling a business and, for each, outline the beneficial characteristics that a consultant can provide.

This article is written within the context of trying to sell a business (outbound), as opposed to fielding an unsolicited request to buy a business (inbound)

Prelude: Does the Founder Want to Sell?

The reasons for selling a business will first be defined by the owner’s personal situation and desires: Read more of this post

My Life with Animals: Loki’s recovery part two – the great poop watch of 2012

If this content seems odd and off-topic, bear with me as I tie this to my blog’s subject matter. Autumn always draws my attention to the fact that the year will soon end. When this year ends it’ll be 9 years since the Great Recession began. Can you think of many places that have scarcely recovered after all these years? Let me know. As for me, the still bleak economic condition of my hometown of Redding, California always sticks out.

Despite a prevalent impression that there’s nothing to see or do here however, Redding has notable points of interests. Turtle Bay is one of them. During tough times, Turtle Bay continued to adapt and improve operations, including the current transition to a more sustainable business model. If any of you plan to visit Northern California or just pass through, consider giving Turtle Bay, and Redding, your patronage. This story showcases the staff’s devotion to their non-human residents but they also stress that wild animals belong in the wild.

Turtle Bay Blog

I sat for eight hours on the floor with Loki, trying to make him comfortable enough for him to sleep and diligently watching his IV lines. By the end of the day, the vet said that Loki had had a sufficient amount of the IV antibiotics and pain meds that he could leave the clinic. But before we could go, the vet put a pain patch on Loki’s front leg that needed to stay on for three days and that meant that the cone-of-shame needed to stay on as well. Evidently, we weren’t out of the woods yet in many ways.  First, it was going to take a small miracle to stop Loki from getting to that pain patch and consuming it. Second, we still didn’t know if his intestines would heal well enough to hold.  We had to wait for him to successfully defecate to know he was okay. And so…

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