Strategic Level of Confidence: Valuation Methodology for Growing Businesses

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

The Problem
How reliable is a business valuation for a new or growing business?

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:

• 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?

The Process
Future growth prospects for a business can be a matter of opinion

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 + Tangible assets can be valued with relative ease. Intangible assets, and how reliable
intangible assets. 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
Strategic Plan for makes certain predictions based on a set of assumptions. Normal financial analysis is
the business will able to interrogate these assumptions to enable the future profit streams to be
make certain projected, discounted as appropriate, and a current value estimated. But doubt will
always remain on how accurate these future projections are
projections and
assumptions

The SLC Matrix The SLC Matrix does not replace conventional valuation methods but provides
provides a way an overlay that enables the future growth potential of a business to be
to validate the predicted on a more objective and reliable basis
future growth
potential

7 Key Drivers
The ability of a business to grow and sustain new levels of revenue (not
including acquisition) is highly dependent on 7 key attributes

1 Proprietary assets

2 Track record

3 Robustness

4 Scalability

5 Ease of replication

6 Risk of being copied

7 Market sustainability

Key Attribute #1
Proprietary Assets

The Attribute
Proprietary assets can be defined as any physical, intellectual, legal, human or
Track record other asset that is exclusively under the control of the business. The sustainability
2
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
3 Robustness replicated, whether these could be lost or destroyed, and the degree to which the
business depends on these.
4 Scalability 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,
5 Ease of replication 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).


5 - Strong
•Proprietary assets
strong and sustainable
4 - Positive and provide robust long
•Some or all proprietary term business
assets strong and advantage
3 - Neutral confer business
•Proprietary assets advantage
neutral – providing
2 - Negative neither advantage nor
•Minor or fragile disadvantage
proprietary assets
1 - Poor
•Business has no
appreciable proprietary
assets
Rating on 1-5 Scale

Key Attribute #2
Track Record

1 Proprietary assets The Attribute

Track record refers to the demonstrated historic capability of the business and
2 Track record 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
3 Robustness
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
4 Scalability 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
5 Ease of replication resources if required; and subjective measures such as leadership drive, focus and
tenacity. This measure is predicated on the simple assumption that the past
6 Risk of being copied delivery of business results is a strong indicator of future expectation.


5 - Strong
• Strong track record in
successful delivery of
4 - Positive similar objectives
• Track record shows
positive signs of
3 - Neutral previous delivery of
• Track record neutral – similar objectives
past performance leading to moderate
2 - Negative neither adds nor future confidence
• Partial track record of detracts from likelihood
some success in of future delivery
1 - Poor delivery but
unconvincing in relation
•Business unable to show
to current plans
previous successful
delivery of objectives
requiring similar skills
Rating on 1-5 Scale

Key Attribute #3
Robustness

Robustness refers to the level to which the business has the capacity to absorb or
Track record respond to pressure, change, or the unexpected without placing the delivery of
2
future objectives in jeopardy. This may be measured across many dimensions
including financial, human resources, technology, regulation, and competitor
3 Robustness 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
Scalability plans (e.g. plans highly dependant on the capability of a single individual, the
4
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
5 Ease of replication 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.


5 - Strong
• The risk of any
unforseen circumstance
4 - Positive has little likelihood of
• There are few negatively impacting
uncertainties and risks the delivery of future
3 - Neutral and the business is plans
• The business is likely to cope with most
balanced in terms of eventualities
2 - Negative robustness with this
• Some risk exists owing attribute neither strong
to the dependency on nor weak
1 - Poor certain assumptions
• Future plans are highly
dependant on a
number of assumptions
with few or no Rating on 1-5 Scale
alternatives

Key Attribute #4
Scalability
The Attribute
1 Proprietary assets 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
2 Track record 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
3 Robustness smooth growth curve without careful analysis of all variables – for example a
manufacturing plant operating at 70% capacity may see scale economies deliver
4 Scalability 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
5 Ease of replication 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..

5 - Strong
• Clear scalability with
demonstrable benefit
4 - Positive to be obtained with
• Business scalable relative certainty
without major
3 - Neutral impediment and
• No significant moderate benefit
impediments to scale possible
2 - Negative but no clear benefit
• Some capacity either
constraints or other
1 - Poor impediments including
potential for capital
• Significant capacity
investment
constraints, other
growth impediments or
large capital
investments required Rating on 1-5 Scale

Key Attribute #5
Ease of Replication

Unlike scalability which normally assumes the leverage of existing resources or
Track record assets to produce incremental returns, replication addresses the ease, cost, speed
2
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
3 Robustness 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
Scalability characteristics (e.g. location, heritage, personnel, specialization) is likely to be
4
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.
5 Ease of replication 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.


5 - Strong
• Replication will be a
significant growth
4 - Positive driver and the business
• There are clear positive is strongly positioned
benefits in replicating for this to occur with
3 - Neutral the business model and expectation of success
• Replication is irrelevant this is achievable with
as a driver of growth, or no major impediments
2 - Negative the business has no
• Replication is desirable clear advantage or
as a driver of growth disadvantage in this
1 - Poor but will present some regard
challenges
• Growth requires
replication but unique
attributes make this
difficult to achieve
Rating on 1-5 Scale

Key Attribute #6
Risk of Being Copied
The degree to which the business is protected from value erosion through
Track record competitive activity (copy/improve) has a bearing on the ability of the business to
2
deliver its growth plans. Businesses that would be difficult to copy – e.g.
established brand, unique location, strong customer loyalty, secret or protected
3 Robustness intellectual property – should be rated positive or strong. Where no such
uniqueness or protections apply and the landscape is relatively free for
Scalability competitors to easily and quickly copy or even improve, these businesses should
4
receive negative/poor ratings. .




5 - Strong
• The business has
strong protections or
4 - Positive uniqueness and is well
• There is a level of insulated from the risk
comfort that it would of being copied
3 - Neutral be difficult for
• This attribute is either competitors to
of low significance or seriously erode value
2 - Negative the risk of being copied through copying
• There is some risk of is neutral
competitors being able
1 - Poor to copy or improve on
• Few impediments exist the business model
to prevent competitors
copying or improving
the business model Rating on 1-5 Scale

Key Attribute #7
Market Sustainability

This final measure requires analysis not of the target business, but the market in
Track record which the business operates and its future projections, and the alignment of that
2
with the products/services the business produces. Key questions include the
market size and growth, technological advancement, market trends, regulatory
3 Robustness environment, barriers to competitor entry, time scale for ROI, etc. Businesses
rated positive or strong should be able to demonstrate there will be sustainable
Scalability demand for their product/service, or if a fast cycle is expected (e.g. fashion
4
manufacturing, consumer electronics) the speed and quantum related to
obtaining a satisfactory ROI is aligned with market realities. Where this cannot be
5 Ease of replication 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

7 Market sustainability 5 - Strong
• There is a robust and
demonstrated market
4 - Positive for the
• The market outlook for products/services
the products/services is produced with little
3 - Neutral generally positive chance this will change
• The risks and
assurances related to
2 - Negative the future market for
• There is a real risk that the products/services
the market for the are in balance
1 - Poor products/services could
• There is very change and this may
significant risk that the have a negative effect
market may change,
negatively impacting
future prosects
Rating on 1-5 Scale

Methodology
The SLC Matrix is simple but flexible, and a powerful tool if used systematically

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

Attribute Weighting
The relative importance of each attribute can be adjusted on a case by case basis

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

Attribute 1 2 3 4 5
Proprietary STRONGLY UNDER NEUTRAL OVER STRONGLY
assets UNDER WEIGHT WEIGHT UNDER
WEIGHT WEIGHT
Track record

Attribute neither over- or under-
important in this particular case

important in this particular case
Attribute is unimportant in this

Attribute is relatively more
Robustness

Attribute is relatively less

Attribute is critical in this
Strongly over-weight
Default Position
particular case

particular case
Scalability

weighted
Ease of
replication

Risk of being
copied
Market
sustainability

Attribute Weighting Worksheet
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
Allows for the 7 key attributes to be
weighted on a 1-5 scale to Strongly Under Weight Neutral Over Weight Strongly Over
accommodate specific circumstances Under Weight Weight
1 2 3 4 5


2 Track record

3 Robustness

4 Scalability




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

Attribute Score
Each of the 7 key attributes is scored according to the objective analysis of the data
provided and observations of the research team

Using a 5 point scale and the guidance provided within the template, each attribute is scored with 3 representing
neutral

Attribute 1 2 3 4 5
Proprietary POOR WEAK NEUTRAL POSITIVE STRONG
assets

advantaged nor disadvantaged on this
The company is disadvantaged on this

The company is strongly advantaged
The company is neither materially
Track record
disadvantaged on this attribute

The company is placed at an
advantage on this attribute
The company is strongly

Robustness

on this attribute
Scalability
attribute

attribute
Ease of
replication

Risk of being
copied
Market
sustainability

Attribute Score Worksheet
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
Allows for the 7 key attributes to be
scored on a 1-5 scale as objectively as Poor Negative Neutral Positive Strong
possible
1 2 3 4 5


2 Track record

3 Robustness

4 Scalability




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

Consolidation
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

Example
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 E 3 6
Risk of being copied 4 2 6
Market sustainability 5 4 9
SLC Total 46

Final SLC Rating
Add the weighting and score for each attribute and total the sum of all measures

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.

Neutral

Negative Positive

Poor Strong

24 or Lower 25-35 36-48 49-60 61 or Higher
Low level of confidence High level of confidence

Analysis of SLC Rating
Add the weighting and score for each attribute and total the sum of all measures

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

About the Author

A veteran of the Asia Pacific Royal Siam Natural Health and Beauty
business scene, David Christensen is Royal Siam is an international manufacturer
an Australian (with New Zealand and distributor of branded skincare, haircare
roots), currently based in Bangkok, and related health and beauty products, with
Thailand where he is CEO of its headquarters in Bangkok, Thailand.  The
premium skincare and anti aging company specializes in the use of natural
products manufacturer Royal Siam ingredients, leveraging the extensive
Natural Health and Beauty. knowledge base built up over more than 800
Having lived and worked in 14 years by the Thai Traditional Medicine
countries as wide afield as Russia, profession. In addition to this emphasis on
India, and Japan, David has a natural and traditional ingredients, Royal Siam
background in advertising with
researches and includes some of the latest
ingredients and techniques developed by
Saatchi Saatchi and DDB,
modern science resulting in a range of
extensive international business premium skincare and anti aging products that
strategy consulting experience as a represent world best practice in both 100%
Partner with Gravitas Partnership in natural products as well as those that include
Hong Kong, and senior regional line synthetic ingredients.  The company
management roles across Asia distributes its products through retail
Pacific with American Express, operations in Thailand and globally via and
Carlson Wagonlit, and AXA Asia international online store, accessed at
Pacific. http://www.royalsiam.asia.  The website of
His LinkedIn profile can be seen at www.royalsiam.asia contains extensive
this link LinkedIn Profile and you resources and information about the skincare
can contact him by email at industry as well as the role Royal Siam plays
david@royalsiam.asia within the industry.
.

www.royalsiam.asia

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@royalsiam.asia

Background and Thanks

The SLC Matrix may be used without restriction provided appropriate acknowledgement is made

Why was the SLC Matrix developed? Personal Acknowledgments

Both as a consultant and as a senior line manager within multinational The opportunity to work alongside, observe, and learn from a number of
corporations, I have regularly faced the same dilemma – how do I find a way people in varying situations have given me the insights that have
to put some process or objective rigor into the analysis of the future potential contributed to the development of the approach. I particular I would like
of a business, or a business unit, or even an idea that is proposed for future to acknowledge:
development – when historical information isn’t appropriate or sufficient to
adequately predict the likely future outcome. Jamie Donaldson of McNeill Partners, Hong Kong, for the many
projects we worked on together, and his demonstration of rigorous
To some people, this is intuitive (often these make the best entrepreneurs), financial disciplines, systematic process, tenacity and reliability. Mike
but it is very difficult to replicate this. To others, intuition becomes blurred with Blackburn of Gravitas Partnership, Beijing, who is the best example I
ego and personal perspectives and assessments are made on a know of the “intuitive” business decision-maker and his demonstration
preconceived set of assumptions that may or may not be correct. Others may of the ideal application of experience and sound judgement. Terry
adopt a more cautious view and discount anything but past and present Mezger of Deloitte in Hong Kong and John O’Rorke, Steve Kean and
financial data, and thus run the risk of failing to capture opportunities. Some Graham Morris of Towers Watson in Hong Kong who all demonstrated
people come from the school that if they trust the people involved, that is all the importance of rigorous and logical methodology in addressing
that is necessary and others have formed the view through experience that it’s complex business issues. Eve Patton of Asia Biotech in Hong Kong
a lottery and some things work and some don’t – so there isn’t much that can who showed the importance of understanding future market trends, long
be done other than a calculated risk. term planning and strategy, patience, and the perspective of the private
equity investor. Tom Thomson of LMG Pacific Health Insurance in
None of these views satisfied me, as each had a propensity to either for Thailand for demonstrating the importance of pragmatic strategies and
higher than acceptable risk exposure through failing to adequately address actions and balancing immediate needs with longer term strategies.
risks, or to lead to a more conservative analysis than was really necessary, Peter Kennerley of Melbourne for demonstrating the value of
leading to the likelihood that opportunities could be overlooked. systematic processes in developing strategy and the need to constantly
challenge assumptions. Gary Bennett of New York Life for his
For this reason the SLC matrix was developed as a means to provide some demonstration that it is the motivation, capability and engagement of
greater rigor and framework for at least asking the right questions, leading to people that ultimately determines whether a strategy succeeds or not,
hopefully a more reliable and robust outcome and decision. I hope this and finally Simon Christensen from Microsoft who has demonstrated
experience resonates with other managers and advisers and the approach is through excellence in software engineering that rigorous and systematic
useful. process does not necessarily stifle creativity but in fact may allow it to
flourish

Strategic Level of Confidence: Valuation Methodology for Growing Businesses

Recommended

Recommended

More Related Content

What's hot

What's hot (18)

Viewers also liked

Viewers also liked (18)

Similar to Strategic Level of Confidence: Valuation Methodology for Growing Businesses

Similar to Strategic Level of Confidence: Valuation Methodology for Growing Businesses (20)

More from David Christensen

More from David Christensen (20)

Recently uploaded

Recently uploaded (20)

Strategic Level of Confidence: Valuation Methodology for Growing Businesses