Because I said so: How to measure what matters

Metrics are misunderstood by many business leaders, mainly because it is tough to get our arms around what to measure to make sure it’s something that truly matters. The Fundamental Catechisms of Metrics According to the Business Genome provides an easy how-to tool.

Who’s worth more? Warren Buffett or Jimmy Buffett? How to turn a snail into escargot

by Andrea Kates, Founder, Business Genome™

One of my colleagues (well, actually, my brother) asked a great question last week (albeit tongue-in-cheek, margarita-in-hand): “Who’s worth more these days, Warren Buffett or Jimmy Buffett?”

Definitely worth calculating.

The question sparked an interesting mental riff on how to determine business value. The traditional approach is to add up the revenues, look at stock price, dig into earnings, do some due diligence about the management, the market and the mechanics and devise an equation that summarizes our impressions about the future. We look at internally-generated information and past results. We factor in peer-to-peer comparisons. If we’re really feeling creative, we look at some adjacent markets (usually not too much stretching here with regard to who’s “adjacent” to our current business model, but that’s a topic for another day). And the truly ambitious try to “model” with something like scenario planning, trend analysis, or some other version of the statistical crystal balls.

The back of our envelope looks like a cool snapshot that is supposed to give us peace of mind about the present state of business affairs, and some assurances about the future of our companies.

But, if you’re like me, you always experience a bit of uneasiness when you present your calculation on the worth of your business or frankly, any business that you’re due diligence-ing.

Why is that? Why is it so hard to feel certain about figuring out what a business is worth?

Well, let’s start with why we care about a business’ worth. Most people I’ve worked with are either leaders of large companies or entrepreneurs trying to uncover new opportunities to build their businesses. The large companies have to adhere to specific guidelines based on shareholder requirements, covenants, and coverage ratios. The small and medium sized companies have a slightly different perspective–what we call SMB DNA™—and they are trying to make tough decisions, raise and manage capital, and develop plans for the future. All of which hinge on feeling a sense of certainty about what their business is worth.

Business Genome™ started a back-of-the-envelope view of what matters most when valuing a company and came up with a few conjectures (written in plain English) about what might make sense to consider in determining the worth of a company:

1. What are the current revenues and current earnings? How do those compare with the past, the peers, the potential?
2. How popular is the company? How many users of the technology, product, service?
3. How current is the “brand” (widespread familiarity, overall goodwill)?
4. How fast is the velocity of growth (based on trends)?
5. How unique is the overall value proposition in the market?
6. How innovative is the offering?

Based on that first envelope, Facebook should be worth a lot. So, why did Facebook’s valuation plunge last week?

The VC Experts.com Inc Analyst Team wrote a striking analysis:

“With a failed Twitter acquisition, lower-than-expected revenue projections and a CFO ‘out the door’, March 2009 wasn’t exactly a banner month for the social networking behemoth Facebook. Add in speculation looming about the company seeking an additional $100 million in debt financing just to stay afloat, the overall value of the company no longer whet the appetite of even the most daring investor.”

Huh? How can Facebook, a company with more than 175 million active users, be a “sell?” What are the factors that we add up (see above: leadership, speculation, capital structure, revenue projections) that equate to a meaningful calculation of value?

Interestingly, in the report that described VC Experts’ proprietary analysis tool, a very compelling set of calculations was explained, with a final comment: “Due to the protected methodology of our valuation process, we cannot reveal too much of the calculation.”

See what I mean? It’s complicated.

But to simplify the basic question, it is definitely worth revisiting which factors truly capture the worth of a company, not just as an accumulation of past performance or current perceptions, but as a reflection of the future. Based on those factors, what would it take to really drive value? What would the gold standard be for valuation in that scenario? What would it take to assess the value of a snail today, and acknowledge its potential for value as escargot?

What does it take for a snail to spiral upward to the value of escargot?

Or, what would it take to reduce the valuation of a company based on new assessments of worth? As business leaders we have a responsibility to think in new ways about the question: How are we calculating our company’s worth? Are there factors that we are missing or ignoring that would change our equation?

When it comes to great business philosophers, the two Buffetts are full of folk wisdom that can help guide our thinking on how to assess the true worth of our enterprises. In the context of rethinking the value equation, I think it’s time to dust off the Warren Buffett-ism, “the investor of today does not benefit from yesterday’s growth,” and create a new Business Genome-ism, “the business leader of today does not benefit from yesterday’s approach to assessing of his/her company’s worth.”

It’s time to rethink the basics.

Musical Coda
Cheeseburger in Paradise by Jimmy Buffett

Tried to amend my carnivorous habits
Made it nearly seventy days
Losin’ weight without speed, eatin’ sunflower seeds
Drinkin’ lots of carrot juice and soakin’ up rays

But at night I’d had these wonderful dreams
Some kind of sensuous treat
Not zucchini, fettuccine or bulghur wheat
But a big warm bun and a huge hunk of meat

Chorus:
Cheeseburger in paradise (paradise)
Heaven on earth with an onion slice (paradise)
Not too particular not too precise (paradise)
I’m just a cheeseburger in paradise

Heard about the old time sailor men
They eat the same thing again and again
Warm beer and bread they said could raise the dead
Well it reminds me of the menu at a Holiday Inn

Times have changed for sailors these days
When I’m in port I get what I need
Not just Havanas or bananas or daiquiris
But that American creation on which I feed

Chorus:
Cheeseburger in paradise (paradise)
Medium rare with mustard ‘be nice (paradise)
Heaven on earth with an onion slice (paradise)
I’m just a cheeseburger in paradise

I like mine with lettuce and tomato
Heinz 57 and French fried potatoes
Big kosher pickle and a cold draft beer
Well good God Almighty which way do I steer for my

Chorus:
Cheeseburger in paradise (paradise)
Makin’ the best of every virtue and vice (paradise)
Worth every damn bit of sacrifice (paradise)
To get a cheeseburger in paradise
To be a cheeseburger in paradise
I’m just a cheeseburger in paradise

Coda:
I like mine with lettuce and tomato
Heinz 57 and French fried potatoes
Big kosher pickle and a cold draft beer
Well good God Almighty which way do I steer for my…