THE TARGET VALUE PROPOSITION

The Target Value Proposition: The General Concept

The Target Value Proposition (TVP) considers business firm value and value creation from a “first principles” of corporate finance, financial statements, and valuation analytics perspective. TVP is grounded in financial theory and empirical experience where firm value (FV) results from and is measured by the operational performance of the firm, most of which is within the owners’ control.

TVP is a comprehensive analytical model and methodology that examines a firm’s key drivers of value: leadership, managerial performance, operational optimization, governance structure and resiliency. The analysis eliminates the confusion caused by the misconceptions, inaccuracies, hearsay, and myths that surround firm value by focusing on the insight-noise ratio, where noise is present in copious quantities and insights are few. Noise is considered any distraction from the focus on the key drivers of firm value so that insights can emerge. Once insights surface attention can be focused on managerial and process improvements that can enhance value creation.

Point of Departure: The Business Owners

TVP starts with what an owner desires from a sale of a business, or what TVP calls the desired price (DP). Using the classical Multiple of EBITDA Model (MOE), an implied value (IV) is determined. Typically, a gap may exist between the implied value and the desired price. TVP then focuses on what it will take in terms of firm performance to make the firm’s IV closer to the owner’s DP.

The TVP process compels owners to be realistic and objective about the value of the firm and to reconsider the DP as the owner comes to understand and appreciate that the multiple may be outside the owner’s control, but EBITDA is within the owner’s control.

To get from the MOE IV to a higher IV requires building a more robust EBITDA (Earnings Before Interest, Taxes, Depreciation & Amortization) with a focus on improving all firm Key Performance Indicators (KPI) to improve company performance.

TVP uses a curated journey metaphor to methodically guide the reader through the basic concepts of firm value and provide insights into how they are connected and apply in practice.

The TVP Curated Journey

 The TVP process takes the business owner through a curated journey of business valuation and financial concepts. Importantly, this approach attempts to provide a focus on the true sources of firm valuation and mitigate the “noise” caused by misinformation, rumors, and myths that surround the subject of firm value. A “Road Map” to the TVP Curated Journey provides the path, key concepts, and order in which the subjects are discussed.

Before the journey begins, it is helpful to acknowledge some of the “mental models” that are relevant in thinking conceptually about firm value.

 Applied Mental Models

 The TVP process of firm value uses a variety of mental models to help orient business owners to gain greater understanding of the process of determining firm value. Such models include, but are not limited to:

• Well-run Company Model
• Noise / Insight Problem Model
• Supply & Demand Model
• Fair Market Value Model
• Classic Multiple of EBITDA Model
• Efficient Market Model
• Human Behavior Model
• Glass Onion Model

TVP uses models to make the complex and detailed valuation dynamics more understandable, Of course, it is acknowledged and understood that assumptions on which models are based are dynamic, which may impact insights gained from model outcomes.

The TVP Curated Journey Map

The TVP Curated Journey Road Map has many touch points, but the journey is not a straight line. It is part highway, byway, back streets and stops along the way. It is a circuitous and “round-about” exploration and iterative process.

 A major problem resolved by the TVP journey is that readers commonly navigate through vast amounts of information on their own, increasing confusion while never arriving at the clear destination of understanding firm value.