Strategic Level of Confidence Valuation Method

Objective process providing level of confidence
in assessing future growth potential of business
entities for investment or prioritization of
investment purposes
Strategic Level of Confidence Matrix

• Where the future of the business may look very different from the past
A business may wish to attract new capital, for example, for a major initiative into new markets, new products, or new
distribution strategies that will dramatically alter the future prospects of the operation. When previous and current
accounts are not able to allow for this, how can a reliable forecast be made?
• Where the business is highly dependant on innovation of one sort or another
The developers of a business that has developed some ground-breaking new technology products are approached
by a multinational who wish to acquire them – however there is no trading history with these new lines. What is the
value of the business?
• Where the business is unique
The owners of a vertically integrated food service business wish to sell. They contract the raw materials, manufacture
and process, and distribute under different brands to supermarkets, food service as well as their own extensive
proprietary retail chain. They are so unique there is no benchmark, so how can this business be accurately valued?
• Where there is high dependancy on one critical factor, such as a key person
A company wishes to enter a new market and has identified the acquisition of a successful local business as the
most attractive option. However the business owes much of its success to its founding family who wish to exit, and
how will this affect future cash flows and the current valuation?
How reliable is a business valuation for a new or growing business?
The Problem
When a business is being valued by a potential purchaser, seller, or investor, or when a company is assessing the
merits of investing resource or capital behind an internal division or concept, a range of factors must be taken into
account, and the final value determined is a product of all of these variables. Some of these variables are relatively easy
to objectively value (e.g. cash, receivables, physical assets), but some are notoriously difficult to value and can be
highly subjective. This difficulty can be exacerbated under a number circumstances such as:

Future growth prospects for a business can be a matter of opinion
The Process
The process of valuing a business is focused on finding a figure (or range) that can be agreed by the parties involved.
At its core, it is the current value of the expected future revenues from the business, adjusted according to the risk
related to these future revenues. The SLC Matrix is designed as a simple way to validate the risk level of projected
future revenues and growth prospects for a business
Tangible assets can be valued with relative ease. Intangible assets, and how
reliable future growth projections are, requires judgement and the SLC Matrix is
designed to provide an objective overlay
Typically a business will have a Strategic Plan (whether formalized or not)
which makes certain predictions based on a set of assumptions. Normal
financial analysis is able to interrogate these assumptions to enable the future
profit streams to be projected, discounted as appropriate, and a current value
estimated. But doubt will always remain on how accurate these future
projections are
The SLC Matrix does not replace conventional valuation methods but provides
an overlay that enables the future growth potential of a business to be
predicted on a more objective and reliable basis
The SLC Matrix
provides a way
to validate the
future growth
potential
Strategic Plan
for the business
will make certain
projections and
assumptions
Tangible assets
+ intangible
assets.

The ability of a business to grow and sustain new levels of revenue
(not including acquisition) is highly dependent on 7 key attributes
7 Key Drivers
Proprietary assets
Market sustainability
Ease of replication
Track record
Scalability
Risk of being copied
1
2
3
4
5
6
7
Robustness

1 - Poor
•Business has no
appreciable proprietary
assets
2 - Negative
•Minor or fragile
proprietary assets
3 - Neutral
•Proprietary assets
neutral – providing
neither advantage nor
disadvantage
4 - Positive
•Some or all proprietary
assets strong and
confer business
advantage
5 - Strong
•Proprietary assets
strong and sustainable
and provide robust long
term business
advantage
Proprietary Assets
Key Attribute #1
Proprietary assets can be defined as any physical, intellectual, legal,
human or other asset that is exclusively under the control of the business.
The sustainability of future growth projections can be highly dependant on
whether the business owns proprietary assets; the extent to which these
are protected or able to be replicated, whether these could be lost or
destroyed, and the degree to which the business depends on these.
Examples include intellectual property such as trade secrets, patents,
brand; legal agreements providing such things as exclusivity; ownership or
control over key elements of the value chain from exclusive supply of a
critical raw material, distribution monopoly; real estate in key locations; etc.
Human capital may also be seen as a proprietary asset the variables being
the level of control (e.g. restrictions on trade or anti-competition) and
death/disability risk (which can be mitigated through insurance).
The AttributeProprietary assets
Ease of replication
Track record
Scalability
1
2
3
4
5
6
7
Robustness
✓
Rating on 1-5 Scale

Track Record
Key Attribute #2
Track record refers to the demonstrated historic capability of the business
and management team to deliver consistently on new initiatives, and the
level of similarity between past and future plans. A business/management
team that can demonstrate the successful delivery of similar challenges
and meet objectives should be rated highly as likely to possess the
necessary capabilities to continue to deliver. Conversely a history of failing
to achieve objectives or deliver to plan, or future expectations that may
require different experience or skill sets to deliver are indicative of a low
level of confidence. Judgement must be used to allow for such variables as
willingness to engage new and appropriately skilled specialist resources if
required; and subjective measures such as leadership drive, focus and
tenacity. This measure is predicated on the simple assumption that the past
delivery of business results is a strong indicator of future expectation.
Ease of replication
Track record
Scalability
1
2
3
4
5
6
7
Robustness
✓
1 - Poor
•Business unable to show
previous successful
delivery of objectives
requiring similar skills
2 - Negative
• Partial track record of
some success in
delivery but
unconvincing in relation
to current plans
3 - Neutral
• Track record neutral –
past performance
neither adds nor
detracts from likelihood
of future delivery
4 - Positive
• Track record shows
positive signs of
previous delivery of
similar objectives
leading to moderate
future confidence
5 - Strong
• Strong track record in
successful delivery of
similar objectives
Rating on 1-5 Scale

Robustness
Key Attribute #3
Robustness refers to the level to which the business has the capacity to
absorb or respond to pressure, change, or the unexpected without placing
the delivery of future objectives in jeopardy. This may be measured across
many dimensions including financial, human resources, technology,
regulation, and competitor activity among others. In cases where the
delivery of future plans have significant dependency on a small number of
variables that could dramatically impact future plans (e.g. plans highly
dependant on the capability of a single individual, the status quo or change
of critical legislation, or the availability of additional funding not yet secured)
will be scored negative/poor on this attribute according to the level of
fragility and risk identified. Conversely where it can be shown that future
plans have only minor exposure to such dependencies, or for example
where multiple options are available reducing the relative future risk, the
business should receive a positive/strong rating for robustness.
Ease of replication
Track record
Scalability
1
2
3
4
5
6
7
Robustness✓
1 - Poor
• Future plans are highly
dependant on a
number of assumptions
with few or no
alternatives
2 - Negative
• Some risk exists owing
to the dependency on
certain assumptions
3 - Neutral
• The business is
balanced in terms of
robustness with this
attribute neither strong
nor weak
4 - Positive
• There are few
uncertainties and risks
and the business is
likely to cope with most
eventualities
5 - Strong
• The risk of any
unforseen circumstance
has little likelihood of
negatively impacting
the delivery of future
plans
Rating on 1-5 Scale

Scalability
Key Attribute #4
Scalability refers to the ease, cost, speed and reliability of using the
existing business as a basis for expansion (scale). Analysis under this
attribute requires the testing of a range of scale or volume increments and
hinges on identifying capacity constraints within the entire value chain of
the business and modelling the cost and revenue implications. It is critical
not to assume scale efficiencies or a smooth growth curve without careful
analysis of all variables – for example a manufacturing plant operating at
70% capacity may see scale economies deliver unit cost reduction at 25%
growth, but at 50% growth the cost of additional plant (which would then be
under-utilized) could result in overall increased unit cost. Businesses with
capacity constraints or other impediments across the entire value chain, or
those whose nature requires significant step increments to costs should
receive negative/poor ratings while those with few capacity constraints and
where margins are stable with growth should be ranked positive/strong..
The Attribute
Proprietary assets
Ease of replication
Track record
Scalability
1
2
3
4
5
6
7
Robustness
✓
1 - Poor
• Significant capacity
constraints, other
growth impediments or
large capital
investments required
2 - Negative
• Some capacity
constraints or other
impediments including
potential for capital
investment
3 - Neutral
• No significant
impediments to scale
but no clear benefit
either
4 - Positive
• Business scalable
without major
impediment and
moderate benefit
possible
5 - Strong
• Clear scalability with
demonstrable benefit
to be obtained with
relative certainty
Rating on 1-5 Scale

Ease of Replication
Key Attribute #5
Unlike scalability which normally assumes the leverage of existing
resources or assets to produce incremental returns, replication addresses
the ease, cost, speed and other key factors in the duplication, or cloning, of
a business. Many franchise models, for example, grow through the
replication of businesses that have been shown to have suitable scale.
Naturally there is a relationship between these two attributes. A business
that would be difficult to replicate because of its unique characteristics (e.g.
location, heritage, personnel, specialization) is likely to be rated neutral
through poor, while one that has no such impediments and can be easily
and quickly replicated many times over should be rated positive to strong.
In circumstances where the future growth projections of a business do not
require replication in any way the rating should be neutral as the business
will be neither advantaged nor disadvantaged by this attribute.
Ease of replication
Track record
Scalability
1
2
3
4
5
6
7
Robustness
✓
1 - Poor
• Growth requires
replication but unique
attributes make this
difficult to achieve
2 - Negative
• Replication is desirable
as a driver of growth
but will present some
challenges
3 - Neutral
• Replication is irrelevant
as a driver of growth, or
the business has no
clear advantage or
disadvantage in this
regard
4 - Positive
• There are clear positive
benefits in replicating
the business model and
this is achievable with
no major impediments
5 - Strong
• Replication will be a
significant growth
driver and the business
is strongly positioned
for this to occur with
expectation of success
Rating on 1-5 Scale

Risk of Being Copied
Key Attribute #6
The degree to which the business is protected from value erosion through
competitive activity (copy/improve) has a bearing on the ability of the
business to deliver its growth plans. Businesses that would be difficult to
copy – e.g. established brand, unique location, strong customer loyalty,
secret or protected intellectual property – should be rated positive or strong.
Where no such uniqueness or protections apply and the landscape is
relatively free for competitors to easily and quickly copy or even improve,
these businesses should receive negative/poor ratings. .
Ease of replication
Track record
Scalability
1
2
3
4
5
6
7
Robustness
✓
1 - Poor
• Few impediments exist
to prevent competitors
copying or improving
the business model
2 - Negative
• There is some risk of
competitors being able
to copy or improve on
the business model
3 - Neutral
• This attribute is either
of low significance or
the risk of being copied
is neutral
4 - Positive
• There is a level of
comfort that it would
be difficult for
competitors to
seriously erode value
through copying
5 - Strong
• The business has
strong protections or
uniqueness and is well
insulated from the risk
of being copied
Rating on 1-5 Scale

Market Sustainability
Key Attribute #7
This final measure requires analysis not of the target business, but the
market in which the business operates and its future projections, and the
alignment of that with the products/services the business produces. Key
questions include the market size and growth, technological advancement,
market trends, regulatory environment, barriers to competitor entry, time
scale for ROI, etc. Businesses rated positive or strong should be able to
demonstrate there will be sustainable demand for their product/service, or if
a fast cycle is expected (e.g. fashion manufacturing, consumer electronics)
the speed and quantum related to obtaining a satisfactory ROI is aligned
with market realities. Where this cannot be demonstrated or unquantified
risks are present (such as new technologies that could leapfrog the current
business model or dependence on a key issue that may change (such as a
regulation, tax or tariff treatment, personal relationship etc) the business
should receive a negative/poor rating
Ease of replication
Track record
Scalability
1
2
3
4
5
6
7
Robustness
✓
1 - Poor
• There is very
significant risk that the
market may change,
negatively impacting
future prosects
2 - Negative
• There is a real risk that
the market for the
products/services could
change and this may
have a negative effect
3 - Neutral
• The risks and
assurances related to
the future market for
the products/services
are in balance
4 - Positive
• The market outlook for
the products/services is
generally positive
5 - Strong
• There is a robust and
demonstrated market
for the
products/services
produced with little
chance this will change
Rating on 1-5 Scale

The SLC Matrix is simple but flexible, and a powerful tool if used systematically
Methodology
1. Gather Data
Undertake research
to obtain objective
data relevant to
each of the 7 key
attributes
2. Adjust Attribute Weighting
Decide on the
relative importance
of each attribute for
the particular case
On a 1-5 scale
default (neutral) is 3
but each attribute
may be over- or
under-weighted by
2 points
3. Apply Scoring
Score each attribute
based on the data
collected, as
objectively and
consistently as
possible
4. Tabulate and Determine Final
Rating
Complete the
matrix, calculate
the total score and
determine final
rating
5. Populate
Summary Report
Produce summary
report or additional
materials as
required

The relative importance of each attribute can be adjusted on a case by case basis
Attribute Weighting
Attribute 1 2 3 4 5
Proprietary
assets
Attributeisunimportantinthis
particularcase
Attributeisrelativelyless
importantinthisparticularcase
DefaultPosition
Attributeneitherover-orunder-
weighted
Attributeisrelativelymore
importantinthisparticularcase
Stronglyover-weight
Attributeiscriticalinthis
particularcase
Track record
Robustness
Scalability
Ease of
replication
Risk of being
copied
Market
sustainability
To ensure the model if flexible and can cater for a range of different scenarios, each attribute can be under- or over-
weighted by 2 points above or below the median/neutral of 3
STRONGLY
UNDER
WEIGHT
UNDER
WEIGHT
NEUTRAL OVER
WEIGHT
STRONGLY
UNDER
WEIGHT

Proprietary assets
Ease of replication
Track record
Scalability
1
2
3
4
5
6
7
Robustness
1. Grade the importance of each attribute on a 5-point scale
2. Arrive at score according to individual and specific circumstances
of the company or market to identify which attributes are more and
less important than others in this particular case
Attribute Weighting Worksheet
Strongly
Under Weight
1
Under Weight
2
Neutral
3
Over Weight
4
Strongly Over
Weight
5
Allows for the 7 key attributes to be
weighted on a 1-5 scale to
accommodate specific circumstances
Each key attribute is graded on a 1-5 scale
as objectively as possible depending on
how important this particular attribute is
for the particular circumstances

Each of the 7 key attributes is scored according to the objective analysis of the data
provided and observations of the research team
Attribute Score
Attribute 1 2 3 4 5
Proprietary
assets Thecompanyisstrongly
disadvantagedonthisattribute
Thecompanyisdisadvantagedonthis
attribute
Thecompanyisneithermaterially
advantagednordisadvantagedonthis
attribute
Thecompanyisplacedatan
advantageonthisattribute
Thecompanyisstronglyadvantaged
onthisattribute
Track record
Robustness
Scalability
Ease of
replication
Risk of being
copied
Market
sustainability
Using a 5 point scale and the guidance provided within the template, each attribute is scored with 3 representing
neutral
STRONGPOOR WEAK NEUTRAL POSITIVE

Proprietary assets
Ease of replication
Track record
Scalability
1
2
3
4
5
6
7
Robustness
1. Based on data and observation, grade the business on the 1-5
scale according to the guidelines set out in the summary of each
attribute
Attribute Score Worksheet
Poor
1
Negative
2
Neutral
3
Positive
4
Strong
5
Allows for the 7 key attributes to be
scored on a 1-5 scale as objectively as
possible
Each key attribute is graded on a 1-5 scale
as objectively as possible according to the
guidelines laid out in the summary of each
attribute

E
1. Enter the weighting for each attribute and the score given on a 1-5 scale
2. Add weighting and attribute score and total the two scores for each attribute to derive
final SLC Total
Consolidation
Attribute Weighting Score Weighting + Score
Proprietary assets 4 5 9
Track record 3 2 5
Robustness 3 3 6
Scalability 2 3 5
Ease of replication 3 3 6
Risk of being copied 4 2 6
Market sustainability 5 4 9
SLC Total 46
Example

Add the weighting and score for each attribute and total the sum of all measures
Final SLC Rating
Each of the 7 attributes may be scored from 1 (low) to 5 (high) resulting in the possible spread of scores 7-35 with a
mid point of 21.
Each attribute is also weighted for importance on the same basis.
The blended total therefore has a potential spread of 14 – 70 with 42 being the neutral mid point.
Poor
Negative
Neutral
Positive
Strong
Low level of confidence High level of confidence
24 or Lower 61 or Higher49-6036-4825-35

Add the weighting and score for each attribute and total the sum of all measures
Analysis of SLC Rating
Analysis of the
capability of the
business to deliver on
the key attributes that
are likely to determine
success indicates a low
level of correlation.
The level of confidence
in the business being
able to successfully
deliver on its objectives
is low and this is likely
to be driven by
multiple factors.
Extreme caution is
advised and
fundamental
changes need to
be undertaken or
the concept
abandoned
Poor
Analysis of the
capability of the
success indicates a
level of correlation that
is negative to some
extent
is negative however
this may be mitigated if
the specific factors
were addressed to a
satisfactory level.
Caution is advised
and a number of
issues should be
addressed before
proceeding
Negative
Analysis of the capability
of the business to deliver
on the key attributes that
success indicates neither
strong positive or negative
correlation
Level of confidence in the
business successfully
delivering on its objectives
is neutral indicating the
absence of significant
negative factors, but also
the possible lack of any
compelling positive
factors.
Less caution is
required with
reasonable levels of
confidence being
justified . Efforts can
focus on identifying
and building greater
confidence in the
positive attributes
Neutral
Analysis of the
capability of the
success indicates a
positive level of
correlation
is positive.
There is clear
reason for
confidence
although it would
be wise to guard
against over-
confidence
Positive
Analysis of the
capability of the
success indicates a very
high level of correlation
is very strong and
compelling.
There is good
reason to have
significant
confidence in the
likelihood the
objectives will be
met
Strong

About the Author
David Christensen resides in, Bangkok, Thailand and has an extensive
career as a Management Consultant and Senior Executive within
multinational corporations spanning the Asia Pacific region.
Specializing in corporate strategy, capital raising and market entry projects,
he has undertaken assignments that have included working in China, Hong
Kong, Taiwan, Japan, South Korea, India, Singapore, Thailand, and the
Russian Federation as well as Australasia.
He was a Partner with Gravitas Partnership based in Hong Kong and his
corporate experience has included regional senior executive roles within
American Express, Carlson Wagonlit Travel, Mercer, and AXA Asia Pacific.
He can be contacted by email at david.d.christensen@gmail.com; his
LinkedIn profile seen at th.linkedin.com/in/daviddchristensen/ and his
articles on a range of topics seen a www.inversionpoint.com/

Acknowledgment of Use
The SLC Matrix may be used without restriction provided appropriate
acknowledgement is made and an unlocked version of the document provided
upon request
The concepts and content contained in the SLC approach may be freely used or
adapted for use without restriction or prior approval provided appropriate
acknowledgment if given to the author.
In undertaking valuation exercises or analysing the future potential of business
entities for a variety of reasons, no two situations are exactly the same as there are so
many differing variables.
However the common lack of any form of systematic framework or methodology for
assessing the future potential of a business can often place too much emphasis on
historic data, or to use pure financial data as the primary criteria – neither of which
may give a full picture.
Use of the SLC Matrix, or developing a more focused approach using SLC as a base,
will in many cases assist those involved in being able to see more clearly out of the
front window of the vehicle they are driving, rather than attempting to drive forward,
while looking in the rear view mirror!
Please contact the author if you have any further questions or comments.
An unlocked version of this PowerPoint document will be provided upon request.
david.d.christensen@gmail.com

Background and Thanks
The SLC Matrix may be used without restriction provided appropriate
acknowledgement is made
Why was the SLC Matrix developed?
Both as a consultant and as a senior line manager within multinational
corporations, I have regularly faced the same dilemma – how do I find a way
to put some process or objective rigor into the analysis of the future potential
of a business, or a business unit, or even an idea that is proposed for future
development – when historical information isn’t appropriate or sufficient to
adequately predict the likely future outcome.
To some people, this is intuitive (often these make the best entrepreneurs),
but it is very difficult to replicate this. To others, intuition becomes blurred with
ego and personal perspectives and assessments are made on a
preconceived set of assumptions that may or may not be correct. Others may
adopt a more cautious view and discount anything but past and present
financial data, and thus run the risk of failing to capture opportunities. Some
people come from the school that if they trust the people involved, that is all
that is necessary and others have formed the view through experience that it’s
a lottery and some things work and some don’t – so there isn’t much that can
be done other than a calculated risk.
None of these views satisfied me, as each had a propensity to either for
higher than acceptable risk exposure through failing to adequately address
risks, or to lead to a more conservative analysis than was really necessary,
leading to the likelihood that opportunities could be overlooked.
For this reason the SLC matrix was developed as a means to provide some
greater rigor and framework for at least asking the right questions, leading to
hopefully a more reliable and robust outcome and decision. I hope this
experience resonates with other managers and advisers and the approach is
useful.
Personal Acknowledgments
I would like to acknowledge:
Jamie Donaldson of McNeill & Partners, Hong Kong, for the many
projects we worked on together, and his demonstration of rigorous
financial disciplines, systematic process, tenacity and reliability. Mike
Blackburn of Gravitas Partnership, Beijing, who is the best example I
know of the “intuitive” business decision-maker and his demonstration
of the ideal application of experience and sound judgement. Terry
Mezger of Deloitte in Hong Kong and John O’Rorke, Steve Kean and
Graham Morris formerly of Towers Watson in Hong Kong who all
demonstrated the importance of rigorous and logical methodology in
addressing complex business issues. Eve Patton of Asia Biotech in
Hong Kong who showed the importance of understanding future market
trends, long term planning and strategy, patience, and the perspective
of the private equity investor. Tom Thomson of Pacific CrossHealth
Insurance in Thailand for demonstrating the importance of pragmatic
strategies and actions and balancing immediate needs with longer term
strategies. Peter Kennerley of Melbourne for demonstrating the value
of systematic processes in developing strategy and the need to
constantly challenge assumptions. Gary Bennett of New York Life in
Mexico for his demonstration that it is the motivation, capability and
engagement of people that ultimately determines whether a strategy
succeeds or not, and finally Simon Christensen from Microsoft who
has demonstrated through excellence in software engineering that
rigorous and systematic process does not necessarily stifle creativity
but in fact may allow it to flourish and Anneliese Christensen who
demonstrates the over-riding importance of living a principle-centred
life, and whose pic kissing me at her 21st birthday party remains my
favou

Strategic Level of Confidence Valuation Method

Recommended

Recommended

More Related Content

What's hot

What's hot (20)

Similar to Strategic Level of Confidence Valuation Method

Similar to Strategic Level of Confidence Valuation Method (20)

More from David Christensen

More from David Christensen (20)

Recently uploaded

Recently uploaded (20)

Strategic Level of Confidence Valuation Method