Enterprise Value: How the Best Owner-Managers Build Their Fortune, Capture Their Company's Gains, and Create Their Legacy

Enterprise Value: How the Best Owner-Managers Build Their Fortune, Capture Their Company's Gains, and Create Their Legacy

by Peter Worrell


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Product Details

ISBN-13: 9780071817882
Publisher: McGraw-Hill Professional Publishing
Publication date: 09/11/2013
Pages: 240
Sales rank: 1,154,806
Product dimensions: 6.30(w) x 9.10(h) x 0.90(d)

About the Author

PETER R. WORRELL is CEO and Managing Director of Bigelow LLC, where he has worked since 1980. Bigelow is an independently owned M&A advisory firm with a singular client focus—entrepreneur ownermanagers.

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McGraw-Hill Education

Copyright © 2014 Peter R. Worrell
All rights reserved.
ISBN: 978-0-07-181788-2


The Unique Character of the Entrepreneur Owner-Manager

The Secret of Victory lies not wholly with superior knowledge. It lurks invisible in that Vital Spark, intangible, yet as evident as lightning.


Meet Ted Chandler, peace corps volunteer, a doctor of anthropology, founder of an international development advisory firm called UCT, and a dyed-in-the-wool entrepreneur owner-manager (EOM). What does that mean? What are the character traits of this unique species of human being? What are the strengths of these individuals? How do they think?

Why does it matter? It matters because it's important for you, as an owner-manager, to know your strengths and your biases as you build your organization and think about a capital gain event someday. And it's equally important, probably more important, for EOM's expert advisors and investors to understand what makes the owner-manager tick so they can get to the best outcome together, with the least bafflement possible.

Ted Chandler followed a very different path than Bob Borden (whom we met in the Introduction) did, but the two men have a lot in common. Ted was born in the Midwest and as a young man did a stint as a volunteer in the Peace Corps in Ghana. There, with his heart opened and his mind illuminated, he realized that being able to make a difference for the better in people's lives was his True North. He seriously considered signing on with the Peace Corps as a full-time professional employee but, on closer inspection, saw a culture that rewarded the politically shrewd over the personally passionate.

Still searching, Ted went back to school, earned a PhD in anthropology, and then decided entrepreneurship was the way for him to make a big positive difference in people's lives. He founded a small consulting firm that advised developing nations in the domains of agriculture, environment, water, democracy, antiterrorism, and other areas related to infrastructure—the same areas that fascinated him as a Peace Corps volunteer. He did not abandon his True North; if anything, he dedicated more energy and capital to it. And the company was successful, effective on the ground, attracting world-class talent, and growing. UCT eventually employed hundreds of people and established dozens of offices around the world, successfully carrying out large complex projects that changed people's lives for the better in Africa and around the globe.

So far, so good. But UCT's growth had also generated a familiar conundrum: As people grew and took on new responsibilities within the organization, they also moved away from their unique competencies. People who had been effective in the field proved to be less so as managers; a brilliant water management engineer isn't necessarily the right person to manage a team of 20 environmental engineers. There wasn't a shortage of professional managers who could do the basics—keeping an office organized and on task—but UCT's mission was loftier than that. Too many professional managers were unable to hear the authentic heartbeat of the company.

By the time I first met Ted, there was no doubt this chapter of his personal journey was ending. By "ending" I don't mean winding down while he consulted and advised new owners; I mean Ted wanted out. He wanted to hand over the ownership responsibility to a great new majority owner—one who would be a terrific fit and fully in tune with the mission—and be personally liberated to walk out the door and into the next chapter of his life. He knew exactly how he wanted that story to go. He wanted to spend more time with his wife, kids, and grandkids at their place in Costa Rica, and to execute on some important global philanthropic interests he shared with his wife. He was seriously considering getting back to his love: being in the field through another volunteer stint with the Peace Corps. Ted, more than any other owner-manager I have met, came to our initial discussion clear that he was driven to achieve his personal transition and professional transaction simultaneously, and in a specific type of way.

When I gently suggested that I admired his vision but that the next owners would appreciate—and pay for—his counsel during the transition, Ted focused his piercing gray eyes into mine and calmly, quietly, and forcefully said, "You are not hearing me, Worrell. No matter who the investor is, I am out day one. If I had wanted a 'partner,' I would have had one by now. If you're saying you can't pull that off, or that it's improbable, tell me now. If that's how it is, I may just have to wind down the operation and liquidate the assets instead." Ted was nothing if not definite and straightforward.

In this case, liquidating the assets was a viable alternative, given the service nature of the business—there was no plant or equipment, no inventory, and few fixed costs. But there were the employees to think about, as well as the vital work they were performing for the customers the company had gained over the years with its name and reputation. Those two factors kept Ted from going down the road of liquidation.

We set to work. Part of my role was to help Ted configure the organization so he could make a clean departure. We immediately promoted one of his senior managers to president/CEO, moved Ted into the chairman role, and brought his five most senior managers immediately into the discussion of what lay ahead. They were the ones who would have to execute the business plan with the new owner, so they had to be ready—in fact, it had to be their plan.

We prepared materials on UCT that were very candid about Ted's posttransaction desires: he would exit, or there would be no deal. We crafted an engagement architecture that resulted in Ted having choices between the types of investors who wanted to become the next majority owner of UCT—a private equity platform company and a publicly owned West Coast–based strategic investor. Ted encouraged his management team to voice their opinions on the best fit, while he kept his favorite to himself. In the end, they all agreed on becoming a wholly owned part of a strategic investor. Now, a few years later, under its ownership and with the leadership of the management team Ted had put in place, UCT has more than doubled in size. Ted earned a fortune and now allocates his personal energy as he had envisioned he would.

A Rare Breed

Owner-managers of private enterprises, such as Ted Chandler and Bob Borden, are a rare breed. Every owner-manager is a unique animal, and, without a doubt, every transaction he or she engages in is different. But in the three decades I've been serving and learning from the leaders of private companies, my colleagues and I have observed some consistent character strengths. Owner-managers are some of the most positive, generous, caring, demanding, energy-creating, and persistent people in the world. They go to work day after day and deal with all the hands-on tasks and responsibilities of management: people issues, technical concerns, regulatory complications, and so on. Their energies and reputations are on the line, and their personal capital is at risk—that is, they have "skin in the game." Many of them build enterprises that employ hundreds of people and create tens of millions of dollars of value.

At the same time, the set of strengths, characteristics, biases, and decision-making approaches that enable the owner-manager to overcome challenges and build valuable enterprises may not be so helpful when it comes to capturing value and transitioning the company. Among those traits, entrepreneur owner-managers tend not to be highly introspective or self-examining, so they may have a harder time dealing with the emotional, psychological, and behavioral issues involved with such fundamental life changes. Just like Bob Borden, they don't deal so well with being thrown into the limelight or enduring gushy scenes. In this regard, Ted Chandler was the exception that proved the rule: he had a high level of self-awareness.

The Top Five Character Strengths

For many years, as I gained experience in this field and became more and more intimately involved with seasoned, successful entrepreneurs, I grew curious about their character. (See Figure 1.1.) Are they really different from other people in the general population, or do they just seem that way? If they are different, what components of character are specific to entrepreneurs? Are there common strengths they possess or develop? Is there causation? And, just as important, what is it that people get wrong about entrepreneurs? What flawed assumptions are overdue for a challenge?

I looked for answers in the emerging field of positive psychology, a field that has developed new insights into optimal performance. Unlike traditional psychology, positive psychology does not concern itself with disorders or dysfunctions but rather focuses on the study of positive human qualities, the strengths or characteristics that give people advantage in their functioning and performance. This stuff matters. Studies have shown that positive emotions actually change how your mind works—and the effects are nonlinear. Effects that are nonexistent at a starting point grow disproportionately large. Sharpening the focus on positive characteristics and emotions broadens and builds your resources for future thriving. Flourishing people perform at exceptionally high levels and add value to organizations.

In 2009, I led my colleagues at Bigelow to kick off original research to try to answer our questions about entrepreneurial character. We sought guidance from three scholars well-known for their work in the field of positive psychology: Martin E. P. Seligman, Chris Peterson, and Angela Duckworth, all of whom are associated with the University of Pennsylvania. Seligman is the acknowledged founder of the positive psychology approach and, with Mihaly "Mike" Csikszentmihalyi (author of Flow), wrote a definitive introduction on the subject of Positive Psychology, in the periodical American Psychologist.

Based partly on their insights and advice, we conducted our research with the help of a standardized positive psychology assessment tool called the Values in Action Inventory of Strengths (VIA-IS). More than 1.3 million people have taken the survey since 2001 (viacharacter.org/surveys.aspx) which is a very large sample. We used a questionnaire called "The VIA Brief Inventory of Strengths," created by Chris Peterson and Martin Seligman, that asks the respondents to rate themselves on each of 24 traits on a scale of 1 to 5.

In addition, we wanted to take a closer look at a characteristic we believe is key to entrepreneurs but is not included on the VIA-IS classification: Dr. Duckworth and her colleagues define grit as "passion and perseverance for long-term goals." To measure that trait, we used a second survey called "The Short Grit Scale" (Grit-S). Respondents were asked to answer four questions pertaining to their consistency of interests, and four questions pertaining to their persistence of effort.

For our research, we recruited some 200 seasoned, successful entrepreneurs and advisors to them. The advisors who participated were asked to complete the survey as if they were answering for their entrepreneur clients. We did not pay or compensate the respondents.

The results illustrated in Figure 1.1 are illuminating about the character of owner-managers, largely because they were so consistent across the group and because they aligned with my experience with and understanding of these people. Of the 24 character strengths, these are the 5 most common among the owner-managers in our sample:

1. Authenticity. Most seasoned successful owner-managers embody this trait of being genuine and real. They speak the truth as they see it. They act without pretense, and they take responsibility for their feelings and actions. They own their own stories (even the messy ones). They don't usually cover up their vulnerability or their humanness. When Ted Chandler looked me in the eye and said, "I want out," I had no doubt he meant it; he was willing to risk being very transparent with me.

2. Leadership. Leadership is about encouraging a group of which you're a member to get things done by maintaining good relations within the group. I watched as Chandler did this by using his attracting personality to recruit, build, and retain his senior management team.

3. Fairness. Fairness is treating all people the same way according to notions of fairness and justice, not letting your personal feelings bias decisions about others, and giving everyone a fair shot at success. I think Bob Borden exemplified this trait, partly because he had experienced it for himself, as he climbed the ladder from shop-floor worker to president of the company.

4. Gratitude. Gratitude is being aware of and thankful for the good things that happen and, very important, taking time to express your thanks. Throughout his career, Bob Borden was known for this characteristic. He expressed it in many little ways over the years, and in dramatic fashion at the end: with an unexpected and generous cash payment to recognize the contributions of all employees.

5. Zest. Zest is a combination of vitality, enthusiasm, vigor, energy, and excitement. This rings very true for owner-managers. They don't do things halfway or halfheartedly. Life is an adventure for them.

Over time, my hypothesis is that people who exhibit these kinds of positive character strengths don't simply reflect success; focusing on these characteristics can also produce success.

Plus Grit!

Now on to that additional and intriguing trait: grit.

According to the work of Angela Duckworth and her colleagues, grit is a combination of passion and persistence for long-term goals. It is not, as the word might suggest, merely grind-it-out stick-to-itiveness regardless of task. Grit comes from within, and those people who have it aren't particularly dependent on feedback or praise from others. Grit endures—and even strengthens—in the face of challenges and in response to setbacks.

I view grit as an alchemical combination of enthusiasm, persistence, and motivation. Perhaps the persistence is related to their willingness to fail, make a course correction, and continue on their journey. Certainly, the most successful entrepreneurs are the ones who persist and adjust long after others might rationally call it a day. To paraphrase William James, seasoned entrepreneurs seem to have found their second wind—they have tapped a new level of energy. Sure, other types of people manage to get a "second wind" in their careers, but not everybody does, and it doesn't happen very often. Many of the most successful owner-managers live in the second wind, and they have a third, fourth, and fifth wind too.

Decision-Making Biases

Now I'd like to turn to something a little different: some other characteristics that I have persistently observed in my work with entrepreneur owner-managers. You can think of these simply as shortcut habits of mind or, in more technical language, they are called decision-making biases.

At the beginning of my career, when I witnessed friends and clients making decisions that were obviously not in their own best interest, I thought they were probably anomalies. After a number of years, however, I realized they weren't anomalies; in fact, they were systematic, repetitive, and somewhat predictable. I did not have the technical vocabulary then to accurately describe what I saw until I discovered the work of Daniel Kahneman and Amos Tversky in the 1980s. I was thrilled that I found experts who were able to articulately describe and scientifically test the notions I had only fleetingly glimpsed in my mind's eye, and which I had struggled to completely describe to others. With their work, behavioral finance was born, and Kahneman and Tversky became two of my heroes. A psychologist awarded the Nobel Prize in Economics? (This is interesting stuff. Kahneman won the Nobel Prize in 2002 for work he did with Tversky; Tversky could not be awarded the prize, as the Nobel Committee doesn't award posthumously.) And it is clearly relevant to the neighborhood we live in—at the intersection of psychology and finance.

Like many others, I studied classical economics as an undergraduate, and I was taught that for the purposes of thinking about economic decision making in domains of risk, humans act as "Homo Economicus"—the strictly rational decision maker. In fact, people are typically more driven by emotions than they are by rationality and economics. To make this point, the behavioral economist Dick Thaler humorously divides the world into two types of people: the "Humans" and the "Econs." Owner-managers are of the Human species; their decision making is inherently emotional. Investors, on the other hand (who are usually agents), tend to be more coolly rational Econs.

When you're thinking about a capital gain transaction, it's essential for you—the owner-manager, the potential investor or acquirer, and the advisors for both sides—to understand this different orientation toward decision making in risky environments. Econs tend to think Humans are mostly influenced by money, and Humans tend to assume the Econs understand the emotions involved. Neither assumption is accurate.

Excerpted from ENTERPRISE VALUE by PETER R. WORRELL. Copyright © 2014 Peter R. Worrell. Excerpted by permission of McGraw-Hill Education.
All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
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Table of Contents

Acknowledgments vii

Introduction: What Happens at the End? 1

1 The Unique Character of the Entrepreneur Owner-Manager 15

2 Four Hats, One Head, Big Challenge 39

3 Creating Enterprise Value 77

4 Seller Beware: The Private Transaction Market 97

5 Capturing Enterprise Value 135

6 Creating a Positive Legacy 173

7 The Beginning of the Legacy 201

Notes 209

A Note on Sources and Bibliography 211

Index 219

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