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Positive Enterprise Value Blog TTM…Schmee Tee Emm? Entrepreneur Owner-Managers Beware: A True Story
TTM…Schmee Tee Emm? Entrepreneur Owner-Managers Beware: A True Story

TTM…Schmee Tee Emm? Entrepreneur Owner-Managers Beware: A True Story

April 2, 2024

2 minute read

Out Islands, Bahamas

EOM: “Whaddya mean the Private Equity Group (PEG) wants us to reduce the Enterprise Value we already agreed to?!? I knew they’d pull something like this! We’ve already discussed all the financial terms of their offer, and we’ve signed a Letter of Intent that reflects that value.”

Bigelow: “Well, they’ve got a different perspective now that they’ve been able to do some investigation.”

EOM: “Okay, let’s discuss it. Is there anything that was raised in the Due Diligence investigation that wasn’t accurate or was different than we represented, or was a surprise disappointment in performance that they didn’t know about?”

Bigelow: “No."

EOM: “What’s the basis for the PEG even suggesting a price decrease at this late date, then?"

Bigelow: “The PEG computed your Trailing Twelve Month (TTM) average of EBITDA month by month. Because the Company had such a “record breaking” first quarter last year, it makes this year’s ‘very good’ first quarter look ‘not so good’. That’s because to compute TTM, they are dropping off those great months from last year and replacing them in the calculation with merely good months from this year, which makes the TTM EBITDA temporarily go down.”

EOM: “So what? Who cares about your so-called Trailing Twelve Months? Meaningless to me. I never ran the business to maximize or even optimize TTM, I ran it to delight our customers and sustain our Mission and our Legacy, and to build Enterprise Value for the long, long, long term. Is a ‘good’ month or two instead of ‘record’ month or two in the progression of this great brand we’ve built going to change the long-term value? Even in the short term, do we believe the full year performance is going to be less than forecast?”

Bigelow: “No. Your forecast for the year is unchanged; if anything, the internal one is up slightly.”

EOM: “Do we believe there’s anything that is new from the exhaustive due diligence process that negatively impacts the intrinsic value of the enterprise that I have been building for the last 30 years day by day, customer by customer, with sweat, toil, and tears?”

Bigelow: “Not to our knowledge.”

EOM: “Did our Quality of Earnings study and Third-Party Market study validate our Brand position, our Share of Market, and the quality of our performance?”

Bigelow: “Yes, completely.”

EOM: “Then, why would the PEG even suggest a price change when nothing fundamental has changed in the business?”

Bigelow: “Because the PEG people we are dealing with are not principals like you, they are not business owners investing their own money. They say they need bank debt to complete the transaction. So, the answer is, they need to borrow to complete the transaction, and Trailing Twelve Month EBITDA is what they are representing to their senior lenders, and it makes it more difficult for the PEG to optimize the amount and the terms of the bank debt that they’d like to access to close the transaction.”

EOM:So why’s that my problem? I mean, I’ve had to go to the bank and borrow from time to time and I get it. But just because the PEG isn’t able to access the amount of bank debt they’d ideally like to, why should I lower the price of the Enterprise? Why don’t they just increase the amount of their Equity dollars in the deal? That’s what I would do if I found myself in that position? Just like when you sell any other asset—say, a residence, the fair market value isn’t affected by one buyer’s ability to get a mortgage!”

Conclusion: In this world of uncertainty, high performing Entrepreneur Owner-Managers are a beam of light. Together we work tirelessly to develop great strategic alternatives for you as an EOM to unlock your personal and professional potential and to experience your freedom. Why let an Investor (in any asset of yours) transfer their risk of (not getting) financing to you? Why would you put up with that when there is an oversupply of PEGS all offering to rent you the same commodity at similar prices? The answer is you do not need to.

What I am Reading / Listening to

Anita de Monte Laughs Last (2024)
By Xochitl Gonzalez

Contributed by Marisa Lister

I have been in a book club for the past 5 years, and Anita de Monte Laughs Last was our most recent pick, and I must say, one of my favorites to date.  It is a compelling novel that takes readers on a thrilling journey through the complexities of human relationships, power dynamics, and the pursuit of justice. Written by an anonymous author (which for some reason, made me like it even more), I found the narrative to be gripping and the characters well-developed.

The story follows Anita de Monte, a strong-willed and determined woman who finds herself entangled in a web of deceit and betrayal. As she navigates the treacherous waters of corporate intrigue and personal vendettas, Anita must confront her own demons and fight for what she believes is right.  She's got this no-nonsense attitude that you can't help but root for.

What really hooked me were the characters. They're so well-developed and relatable, even if they're a bit shady at times. You find yourself invested in their lives, wondering what they'll do next and who they'll betray, invested in their fates and rooting for their triumphs.

And plot…it’s like a rollercoaster ride – fast-paced, adrenaline-pumping, and full of unexpected drops, keeping readers guessing until the very end.

Overall, I found Anita de Monte Laughs Last a total blast to read. It had everything you could want in a good book – drama, suspense, and a whole lot of heart.

Entrepreneur Owner-Manager Quote

“We think, each of us, that we're much more rational than we are. And we think that we make our decisions because we have good reasons to make them. Even when it's the other way around. We believe in the reasons, because we've already made the decision.

—Daniel Kahneman (March 5, 1934 – March 27, 2024), Pioneering Behavioral Psychologist, Nobel Laureate, and Economist notable for his work on hedonism, the psychology of judgment, and decision-making. He is known as the father of behavioral economics.

Energy Creation

Excerpt from The Farnam Street Blog post
Small Surface Area
Brain Food – No. 559 – January 14, 2024

A different take on what makes us feel so busy, stressed, and anxious.

As a rule, the larger your surface area, the more energy you have to expend maintaining it. Of course, when most of us think of surface area, we think of the area of a rectangle or how much grass we have to mow. But there is a surface area of life, and most of us never realize how much it consumes.

If you have one house, you have a relatively small surface area to maintain (depending on the age and size of the house, of course). If you buy another one, your surface area expands. But it doesn't expand linearly - it expands slightly above that. It's all the same work plus more.

Friends are another type of surface area. You have a finite amount of time to spend with friends before you die. The more friends you have, the less time you can spend with each one individually.

Money is another form of surface area. The more money you have, the more you have to keep track of different types of assets and investments.

When your surface area expands too much, you hire people to help you scale. Assistants, property managers, family offices, etc. They're scaling you - but they're also scaling the surface area of responsibility. This, of course, only masks the rapidly expanding surface area by abstracting it.

Beliefs are another type of surface area.

The thing about surface area is that the more you have, the more you have to defend and maintain. The larger your surface area, the more you are burdened with mentally and physically.

If you think in terms of surface area, it's easy to see why we are so anxious, stressed, and constantly behind.

We feel like we need more time, but what we're craving is more focus. What we need is a smaller surface area.

Your surface area becomes part of your identity. She's the 'busy person' with her hand in every project. He's the guy with four houses.

Competition can drive expansion. Most people want a bigger house to compete with someone else who has a nicer house. We are animals, after all. On a group level, this causes great benefits. On an individual level, it can cause unhappiness.

Most of the really happy people I know have a relatively small surface area. I know billionaires with two houses. Most of my close friends only have 4-5 close friends - everyone else is a friend in the loose sense of the word. Most of the productive people I know at work are focused on one or two things, not 5.

The way to maximize your enjoyment in life is to keep your surface area small. It's a lot of work but if the happiest people I know are any indication, it's a lot less work to keep it small than to maintain it when it's large.


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