EP 116: Evaluating Company-Specific Risk: Telescopic Observation

Welcome to a another episode of the defenders of business value. I'm your host, Ed Mysogland. Today, I've been getting a number of requests to talk about business valuation on how I value companies in sale preparation, or when we're on the buy side, when we're talking when we're looking at target companies, how do I value them. And, and last week, we talked a little bit about market multiples. And this week, we're talking about something called telescopic observation. And this is a framework to drill down pretty deep into what makes a business tick. And, you know, I don't do that for for every company, but but a lot of them. And, and if you're on the buy side, or even on the sell side, it will help you figure out where the company is as it relates to, to the industry. I mean, this is a this is a little bit further into the weeds, when used are evaluating companies. And as you think about industry analysis, what you're trying to do is almost like, like HR does for for evaluating people where they do a 360 review, it's kind of the same framework. And so So historically, and I still do it, I still use IBIS World as a as a source for industry information. But generally speaking, when when I'm trying to dig in and get a total understanding of of the industry and the business and how it sits in the industry, I use I use this telescopic framework, so So this Michel Porter's Five Forces was a lot of people use that and that includes competitive rivalry, supplier power buyer virus, threat of substitution and threat of new industry or new entry. That is that's what Porter's Five, five forces model is and you deep dive each of those. Now telescopic observation, this is an entirely different way of looking at it. So you know, you undoubtedly have heard of the SWOT analysis. And the SWOT analysis is a strengths, weaknesses, opportunities and threats. The SWOT analysis is concerned with the analysis of the the organization's internal and external environment. And it aims to identify the strengths and weaknesses and helps you avoid the threats and exploit the opportunities. So, I don't know if you knew this, but the SWOT analysis started at Harvard. And that was, the guy's the start. It was George Albert Smith, Jr. and Roland Christiansen and so they the and this dates back into the 1950s. And so they, they, they started developing this and then they deployed it. See, I believe it was in 1963. At a Harvard business policy conference, they introduced it and it's been nomenclature there ever since. So the the deficiencies was that, that the SWOT analysis was rooted in vagueness, alright so when when when I look at a company and and identifying its strengths if I'm just a cursory review, it's a matter of looking at it and you know identifying the topical meaning the LSA superficial but the when you're just looking at something you can identify what what's what its strengths and weaknesses are just by looking at a quick Google search will tell you a lot about a company. But this but that's the deficiency it only it doesn't deep dive you so if if you're thinking about buying a company or you're, you're, you're doing 90% leverage like the SBA is offering these days, and you're putting your personal guarantee on the line, you may want to may want to make sure that you have a real clear understanding of of this, you know, of the industry of the business as well as the industry. It operates in, and so, so back to the SWOT. So this thing, this telescopic observation is then gets introduced. All right, and telescopic observation is an acronym. And I'm gonna go through each of these as a, as a as a primer for you to think about it, but the overlays with each of the each letter in the acronym, you apply the SWOT analysis, and that is, that's the secret to, to this thing. And so, as you dig in, let me go through each one of these. So on the telescopic, the first is is technological advancements. Alright, the next is economic considerations. The L is legal and regulatory requirements. The E is ecological and environmental issues. S is the sociological issues. C is competition. Oh, is organizational culture. P is portfolio analysis. And, and I get a lot of questions about what, what does that mean? Well, if there's multiple companies within within the entire organization, that's what that portfolio analysis means. It also can mean products, you know, what are the products in the portfolio, I means international issues, and C is cost cutting, cost efficiencies and cost structures. So, you can see, as you go through as you go through that, if you applied the strengths and weaknesses and the opportunities and the threats, you get a much clearer understanding of that particular business. Now, let's move over to the observation. So, with the observation side is more. So, the telescopic side of it, let me back up the telescopic side is more external, alright, so it's, it's more what's going on outside of the outside of the company, and how things can how matters can affect the company. Now, the observation side, however, that is on the inside. So when we start looking at let's go to, we'll begin with the Oh, so the organizational core and competency competencies and capabilities. Next is E who, who are the buyers? Who are the buyers for the for the product or the service that the company offers? S is suppliers? Who is providing the product in the raw materials, raw materials for for the business? E is E comm e commerce. So can you operate in? What's your online online store? And that's, that's, that's becoming a real big a big issue right now is you know, has the company evolved in order to take advantage of using the internet as a means for revenue? Now, moving on to our is a resource audit, you know, what are the resources that are available within the company to perform its product or or to make its product or performance service? V is the value chain help understand where value is created? Oh, all along the the process of either making the product and delivering it or performing the service and doing it a is alliances? Do you have any kind of or does it have any kind of partnerships networks or joint ventures where the synergies that that that occurs? T total quality management that's pretty self explanatory. I industry key factors for success. Oh is the organizational structure. You know, how is the company structured? And is new entrants, you know, the barriers to entry? Who's Who Was your who is going to be your threat an S is substitute substitute products and services. So you can see. Now this is a deeper dive into into the industry. And again, you can rely on your Ibis world's and some of the other some of the other

publications to provide this kind of information. But ultimately, the the biggest, the biggest thing is, is you do the work, you need it, especially if you're buying a business. I mean, if you're a valuation guy and deal guy like me, I mean, it's, it's one thing to dig, you know, I have to dig in order to make sure I understand what we're selling. But from a buyer standpoint, you really need a clear understanding of that business in order for you to take that next step, step, especially post acquisition integration, the more you understand about the industry and the business, the better and quicker, you can get up to speed and start adding some value. So these next few episodes that are going to be shorter, but I've received a number of questions about, about how we do our business, how we value companies, how we, how we look at the the industry, how we position companies to go to market, how we find buyers and such. So over these next couple episodes, I'll continue to, to talk a little bit more about what we're what we do and how we do it. So if you have a question, you know, certainly drop, drop an email to us, we read all of all of those questions. And we want to be a resource for for everybody, to hopefully either if you want to get into business, hopefully we can help you do that. Or if you're looking to exit a business, we want to we always believe that the best clients that we work with are the most educated and they understand what what it is that the service. Yeah, it's, it's so much more than just finding a buyer. That's the easy part. For us. It's it's, it's value positioning, what's what makes the most sense, and at the end, make a great deal for both parties. So thanks so much, and we'll see you next week.