Optics: Yours & TheirsWHOSE VIEW OF RISK VS. OPPORTUNITY IS AT WORK ?

Carl Sheeler, PhD ASA, CBA, CVAManaging Director, Berkeley Research Group,

Family Offices & Businesses

When & where it counts, you can have less risk, greater mutliples, higher value

Why Optics Are Important?

If there is a series of transactions of stock between sellers and buyers("investors") there are two unique things occurring.

The buyer believes there is upside potential unique to the specificinvestment. The seller believes that liquidity or an alternative investment ispreferred.

Can both views be right?

Business owner risk

Along with opportunity comes risk. We own the choices. While many peoplewish to become entrepreneurs, fewer actually do.

A few more have created a job and some degree of independence, but notmuch else. The pyramid getting from $1 million to $5 million in annual sales,narrows. From $10 million to $25 million in sales, it narrows more with thoseachieving $50 million and above are rare. They have mastered not just their product and service offerings, but have beenadept at managing both their financial and human capital as well as risk.

You too can learn to leverage HUMAN capital along with financial capital andmanage or mitigate risks.

Aversion to your risk

Let's consider the choices of others, namely of advisors, trustees and their firms.They don't see your risk as you do. In fact, most are adverse to it. Their preferenceis a sale of your business. It's easier for them. There is less complexity and theirskills are not adequate to work with your business or your risk.

A variety of views attempt to justify this. They include:Selling is necessary to diversify a concentrated equity asset.Selling is necessary to dilute equity value ( considering it to be a "risk")It's easier to sell and divide up proceeds so heirs can make their own choices.

None of these demonstrate awareness of risk "in" the asset. .

Optics, therefore when not aligned to a common end game will warp outcomes inways you may not want or intend. So lets be clear before you get started, Whatshould your endgame look like and what will be the role of your business in it?" We are being simple for illustration purposes.

The solution

FINANCE & HUMAN CAPITAL skills, experienced in identifying, measuring andoffering options to either manage or mitigate risk "in" the asset. Why? Less risk,the greater the multiple, the higher the value.

As a result, the business can be held by more advisors, financial firms and trustcompanies when there is an external risk management program in place.

There are a variety of ways of making this possible in conjunction with firms,including reporting on shareholder value. This is the best of both worlds forowner, for family wealth and for the financial firm.

For more information, contact Robin or Carl.

Strong Finance skills are needed

What this means

The founder chooses what they will be paid in salary and profits for time, ability andrisk assumed versus what will be reinvested to grow the company for adeferred reward of a higher value.

Most owners would be surprised to learn that if the company fails to have anadequate amount of capital reinvested, this is a primary reason for the business beingstuck at $5 or $10 million in sales.

Yet with the right tools and learning, value can be many fold greater due tocompounding in as short as 10 years.

Optics at work

When an advisor works at a financial institution, law or accounting firm and suggeststo an entrepreneur they should mitigate risk, the real question becomes risk asopposed to what?

The common answer is diversification and often this means publicly traded securities. This might result in less risk and more liquidity, but it does also mean less control.

This is why many owners are hard pressed to act on such advice in a big way.

Many owners know when an advisor doesn't have shared skin in his game. An advisorbelieves skin in the game happens when the owner, prospect or client acti upon thesuggestions offered.

Financial, Law or Accounting

Second example of optics

How does this influence risk of the performing asset such as an operatingbusiness or real property holdings?

If an accountant or tax partner could learn about risk and spend more time onentrepreneurship, legacy, leverage and learning, would this be a most attractiveand value-add relationship?

An accountant may focus on the "risks" of taxes

Issues of asset protection are tabled as a way to preserve principal. Again, thecommon end game tends to migrate to liquidity and diversification.

If an owner is pocketing $2.5 million annually and spending $2 million annually andthen sells the asset for $20 million net and can expect 4% after tax, this produces$800,000 in annual spendable funds.

Unless the prospect/client expects to reduce his expenditures by $1.2 million a year,the viability of protecting principal is an artificial construct.

Third example of optics

Asset protection to preserve principal

Trusted advisor optics

The asset would have to net at least $50 million to generate the $2 millionannual spend (pre-tax).

If the prospect/client relies upon trusted advisors who are unable, unaware orunwilling to assist in enhancing business value by another $30 million, is theiridea of "risk" aligned with that of the person they're seeking to serve?

IF not, would you or your trusted advisor know where to turn and whatquestions to ask?

The uncommon solutionbased in finance

If the client "knew" that services rendered would be billed for at $300,000 oreven $1,000,000 but would produce the $30 million increase with a return of100x or even 30x on fees expended would they agree to doing so?

"Out-of-the-box" solutions alongwith an uncommon solution

Options may include hiring an industry executive to have a salary plus participation inprofit and/or value growth.

It might mean hiring an MBA student as an intern to learn the industry while the MBAeducates the founder on best practices.

It might mean grooming key staff for more important roles.

It might mean selling a minority interest to a private equity firm that has thefunds. personnel and contacts unique to the industry.

Entrepreneur knows there are risks with seizing opportunities.

Perhaps the question is how do advisors prove their mettle to be more worthyof the services they wish to provide. Is there a distinction between thesolutions they offer that reflects a track-record of helping past clients growtheir businesses to 8- and 9-figures or more?

The challenge for the business and entrepreneur is the human capital whichcalls for having a legitimate strategy (versus tactics) to leverage uncommonknowledge and relationships to influence risk. (The lower the risk, the greaterthe multiple and closer to the $50 million target in the example above. Moreto the point financial capital alone won't buy its way to the target without amerger or acquisition or a holistic approach to harness the human capital ofadvisors, owners, staff and other stakeholders.)

Entrepreneurs know thereare risks

Invest in Your Future Let's begin today as your lifestyle & legacy are too

important to leave to misaligned optics.

Carl Sheeler, PhD, ASA, CBA, CVA2049 Century Park East, Suite 2525Los Angeles, CA 90067Phone: 1-310-499-4842 CA 1-646-328-1981 NYEmail: carl@prcio.com orcsheeler@thinkbrg.com

Robin Coady Smith1330 Avenue of the Americas, 23rd FlNew York, NY 10019Phone: 1-646-328-1982Email: robin@prcio.com