The document discusses creating value in a business through incremental business value (IBV). It explains that there are multiple perspectives that can determine a business's value, such as market value, owner value, and investor value. However, the value that truly matters is IBV, which is calculated as Recast EBITDA minus the cost of investment times the cost of capital. The document provides an example to show how IBV can be used to evaluate whether a potential new investment like hiring a salesperson will increase the overall value of the business. It also demonstrates how to calculate the total IBV for an entire company.

1. Creating Value in Your Business
Presented by
Rob Slee, CM&AA, MA, MBA
© 2015 Robert T. Slee. All Rights Reserved.

2. Building America One Business at a TimeCreating Value in a Business
 Value Relativity
• Think of a value for your business
• Who else agrees with this value?
• Without an active trading market, how are private
values determined?
• The reason you need to know the value leads to a
value world
• Every private company has dozens of correct values at
one point in time (because there are dozens of reasons
/ value worlds)
• Why? Not because I say so – but because Authorities
say it is so (perspectives matter in the private markets)
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Slee

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 A Few Value Worlds
• Market Value – what the open market says the
business is worth (Asset, Financial, and Synergy
Subworlds)
• Fair Market Value – what the IRS/Courts say it is worth
• Owner Value – what the owner says it is worth
• Investor Value – what an investor says it is worth
• Collateral Value – what the bank says it is worth
• Incremental Business Value – returns greater than
investment
• 30 second rule…
Slee

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 The Only Value That Matters
• Slee says that at least 80% of company owners are
NOT increasing the value of their firms
• How do you know if your daily decisions are increasing
the value of your firm?
• Incremental Business Value (IBV) is the answer:
IBV = Recast EBITDA – (Investment * Cost of Capital)
Slee

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 Recast EBITDA as the Return
• Reported EBITDA is adjusted for owner discretionary
expenses and one-time expenses
• Why recast EBITDA?
• Let’s agree that: Accounting=Cost; Finance=Value
Slee

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 Investment in Your Business
• Is “book value” meaningful as a metric for judging
investment in your business?
• What is Investment then?
Investment = comprises all expenditures in a project or
business that have a long-term impact. The concept of
Investment is much more expansive than accounting
terms such as book value. For example, Investment
incorporates spending on “nouns” – people, places and
things.
Slee

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 Private Cost of Capital
• Every type of capital has a cost
• What are you demanding as a return on the Investment
in your business?
• Until now we didn’t have empirical evidence of private
cost of capital
• So Slee/Pepperdine teamed-up in 2009 to create the
Pepperdine Cost of Capital surveys
Slee

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Slee

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 Project Decision-Making IBV Example
• Jen wants to hire a salesperson (why?)
• The salesperson will cost $150,000 (all-in)
• Pro forma projections are that the salesperson will
generate $75,000 in EBITDA
• Jen looks at the PPCML and thinks a 25% return is
reasonable for her to expect
IBV = Recast EBITDA – (Investment * Cost of Capital)
IBV = $75,000 – ($150,000 * 25%)
= $37,500 (what does this mean?)
Slee

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 Determining Overall IBV for a Company
• Recast EBITDA is $2.8 million for Jen’s company
• Investment is $4.6 million (BV is < $1 million)
• Cost of capital = 25%
IBV = Recast EBITDA – (Investment * Cost of Capital)
IBV = $2.8 million – ($4.6 million * 25%)
= $1.65 million
Slee