strategic level of confidence valuation method

Objective process providing level of confidence

in assessing future growth potential of business

entities for investment or prioritization of

investment purposes

Strategic Level of Confidence Matrix

• Where the future of the business may look very different from the pastA business may wish to attract new capital, for example, for a major initiative into new markets, new products, or new

distribution strategies that will dramatically alter the future prospects of the operation. When previous and current

accounts are not able to allow for this, how can a reliable forecast be made?

• Where the business is highly dependant on innovation of one sort or anotherThe developers of a business that has developed some ground-breaking new technology products are approached

by a multinational who wish to acquire them – however there is no trading history with these new lines. What is the

value of the business?

• Where the business is uniqueThe owners of a vertically integrated food service business wish to sell. They contract the raw materials, manufacture

and process, and distribute under different brands to supermarkets, food service as well as their own extensive

proprietary retail chain. They are so unique there is no benchmark, so how can this business be accurately valued?

• Where there is high dependancy on one critical factor, such as a key personA company wishes to enter a new market and has identified the acquisition of a successful local business as the

most attractive option. However the business owes much of its success to its founding family who wish to exit, and

how will this affect future cash flows and the current valuation?

How reliable is a business valuation for a new or growing business?The Problem

When a business is being valued by a potential purchaser, seller, or investor, or when a company is assessing the

merits of investing resource or capital behind an internal division or concept, a range of factors must be taken into

account, and the final value determined is a product of all of these variables. Some of these variables are relatively easy

to objectively value (e.g. cash, receivables, physical assets), but some are notoriously difficult to value and can be

highly subjective. This difficulty can be exacerbated under a number circumstances such as:

Future growth prospects for a business can be a matter of opinionThe Process

The process of valuing a business is focused on finding a figure (or range) that can be agreed by the parties involved.

At its core, it is the current value of the expected future revenues from the business, adjusted according to the risk

related to these future revenues. The SLC Matrix is designed as a simple way to validate the risk level of projected

future revenues and growth prospects for a business

Tangible assets can be valued with relative ease. Intangible assets, and how

reliable future growth projections are, requires judgement and the SLC Matrix is

designed to provide an objective overlay

Typically a business will have a Strategic Plan (whether formalized or not)

which makes certain predictions based on a set of assumptions. Normal

financial analysis is able to interrogate these assumptions to enable the future

profit streams to be projected, discounted as appropriate, and a current value

estimated. But doubt will always remain on how accurate these future

projections are

The SLC Matrix does not replace conventional valuation methods but provides

an overlay that enables the future growth potential of a business to be

predicted on a more objective and reliable basis

The SLC Matrix

provides a way

to validate the

future growth

potential

Strategic Plan

for the business

will make certain

projections and

assumptions

Tangible assets

+ intangible

assets.

The ability of a business to grow and sustain new levels of revenue

(not including acquisition) is highly dependent on 7 key attributes

7 Key Drivers

Proprietary assets

Market sustainability

Ease of replication

Track record

Scalability

Risk of being copied

1

2

3

4

5

6

7

Robustness

1 - Poor•Business has no

appreciable proprietary assets

2 - Negative

•Minor or fragile proprietary assets

3 - Neutral

•Proprietary assets neutral – providing neither advantage nor disadvantage

4 - Positive

•Some or all proprietary assets strong and confer business advantage

5 - Strong

•Proprietary assets strong and sustainable and provide robust long term business advantage

Proprietary AssetsKey Attribute #1

Proprietary assets can be defined as any physical, intellectual, legal,

human or other asset that is exclusively under the control of the business.

The sustainability of future growth projections can be highly dependant on

whether the business owns proprietary assets; the extent to which these

are protected or able to be replicated, whether these could be lost or

destroyed, and the degree to which the business depends on these.

Examples include intellectual property such as trade secrets, patents,

brand; legal agreements providing such things as exclusivity; ownership or

control over key elements of the value chain from exclusive supply of a

critical raw material, distribution monopoly; real estate in key locations; etc.

Human capital may also be seen as a proprietary asset the variables being

the level of control (e.g. restrictions on trade or anti-competition) and

death/disability risk (which can be mitigated through insurance).

The AttributeProprietary assets


Ease of replication

Track record

Scalability


1

2

3

4

5

6

7

Robustness

✓

Rating on 1-5 Scale

Track RecordKey Attribute #2

Track record refers to the demonstrated historic capability of the business

and management team to deliver consistently on new initiatives, and the

level of similarity between past and future plans. A business/management

team that can demonstrate the successful delivery of similar challenges

and meet objectives should be rated highly as likely to possess the

necessary capabilities to continue to deliver. Conversely a history of failing

to achieve objectives or deliver to plan, or future expectations that may

require different experience or skill sets to deliver are indicative of a low

level of confidence. Judgement must be used to allow for such variables as

willingness to engage new and appropriately skilled specialist resources if

required; and subjective measures such as leadership drive, focus and

tenacity. This measure is predicated on the simple assumption that the past

delivery of business results is a strong indicator of future expectation.



Ease of replication

Track record

Scalability


1

2

3

4

5

6

7

Robustness

✓

1 - Poor•Business unable to show

previous successful delivery of objectives requiring similar skills

2 - Negative

• Partial track record of some success in delivery but unconvincing in relation to current plans

3 - Neutral

• Track record neutral –past performance neither adds nor detracts from likelihood of future delivery

4 - Positive

• Track record shows positive signs of previous delivery of similar objectives leading to moderate future confidence

5 - Strong

• Strong track record in successful delivery of similar objectives

Rating on 1-5 Scale

RobustnessKey Attribute #3

Robustness refers to the level to which the business has the capacity to

absorb or respond to pressure, change, or the unexpected without placing

the delivery of future objectives in jeopardy. This may be measured across

many dimensions including financial, human resources, technology,

regulation, and competitor activity among others. In cases where the

delivery of future plans have significant dependency on a small number of

variables that could dramatically impact future plans (e.g. plans highly

dependant on the capability of a single individual, the status quo or change

of critical legislation, or the availability of additional funding not yet secured)

will be scored negative/poor on this attribute according to the level of

fragility and risk identified. Conversely where it can be shown that future

plans have only minor exposure to such dependencies, or for example

where multiple options are available reducing the relative future risk, the

business should receive a positive/strong rating for robustness.



Ease of replication

Track record

Scalability


1

2

3

4

5

6

7

Robustness✓

1 - Poor

• Future plans are highly dependant on a number of assumptions with few or no alternatives

2 - Negative

• Some risk exists owing to the dependency on certain assumptions

3 - Neutral

• The business is balanced in terms of robustness with this attribute neither strong nor weak

4 - Positive

• There are few uncertainties and risks and the business is likely to cope with most eventualities

5 - Strong

• The risk of any unforseen circumstance has little likelihood of negatively impacting the delivery of future plans

Rating on 1-5 Scale

ScalabilityKey Attribute #4

Scalability refers to the ease, cost, speed and reliability of using the

existing business as a basis for expansion (scale). Analysis under this

attribute requires the testing of a range of scale or volume increments and

hinges on identifying capacity constraints within the entire value chain of

the business and modelling the cost and revenue implications. It is critical

not to assume scale efficiencies or a smooth growth curve without careful

analysis of all variables – for example a manufacturing plant operating at

70% capacity may see scale economies deliver unit cost reduction at 25%

growth, but at 50% growth the cost of additional plant (which would then be

under-utilized) could result in overall increased unit cost. Businesses with

capacity constraints or other impediments across the entire value chain, or

those whose nature requires significant step increments to costs should

receive negative/poor ratings while those with few capacity constraints and

where margins are stable with growth should be ranked positive/strong..

The Attribute

Proprietary assets


Ease of replication

Track record

Scalability


1

2

3

4

5

6

7

Robustness

✓

1 - Poor• Significant capacity

constraints, other growth impediments or large capital investments required

2 - Negative

• Some capacity constraints or other impediments including potential for capital investment

3 - Neutral

• No significant impediments to scale but no clear benefit either

4 - Positive

• Business scalable without major impediment and moderate benefit possible

5 - Strong

• Clear scalability with demonstrable benefit to be obtained with relative certainty

Rating on 1-5 Scale

Ease of ReplicationKey Attribute #5

Unlike scalability which normally assumes the leverage of existing

resources or assets to produce incremental returns, replication addresses

the ease, cost, speed and other key factors in the duplication, or cloning, of

a business. Many franchise models, for example, grow through the

replication of businesses that have been shown to have suitable scale.

Naturally there is a relationship between these two attributes. A business

that would be difficult to replicate because of its unique characteristics (e.g.

location, heritage, personnel, specialization) is likely to be rated neutral

through poor, while one that has no such impediments and can be easily

and quickly replicated many times over should be rated positive to strong.

In circumstances where the future growth projections of a business do not

require replication in any way the rating should be neutral as the business

will be neither advantaged nor disadvantaged by this attribute.



Ease of replication

Track record

Scalability


1

2

3

4

5

6

7

Robustness

✓

1 - Poor• Growth requires

replication but unique attributes make this difficult to achieve

2 - Negative

• Replication is desirable as a driver of growth but will present some challenges

3 - Neutral

• Replication is irrelevant as a driver of growth, or the business has no clear advantage or disadvantage in this regard

4 - Positive

• There are clear positive benefits in replicating the business model and this is achievable with no major impediments

5 - Strong

• Replication will be a significant growth driver and the business is strongly positioned for this to occur with expectation of success

Rating on 1-5 Scale

Risk of Being Copied

Key Attribute #6

The degree to which the business is protected from value erosion through

competitive activity (copy/improve) has a bearing on the ability of the

business to deliver its growth plans. Businesses that would be difficult to

copy – e.g. established brand, unique location, strong customer loyalty,

secret or protected intellectual property – should be rated positive or strong.

Where no such uniqueness or protections apply and the landscape is

relatively free for competitors to easily and quickly copy or even improve,

these businesses should receive negative/poor ratings. .



Ease of replication

Track record

Scalability


1

2

3

4

5

6

7

Robustness

✓

1 - Poor

• Few impediments exist to prevent competitors copying or improving the business model

2 - Negative

• There is some risk of competitors being able to copy or improve on the business model

3 - Neutral

• This attribute is either of low significance or the risk of being copied is neutral

4 - Positive

• There is a level of comfort that it would be difficult for competitors to seriously erode value through copying

5 - Strong

• The business has strong protections or uniqueness and is well insulated from the risk of being copied

Rating on 1-5 Scale

Market SustainabilityKey Attribute #7

This final measure requires analysis not of the target business, but the

market in which the business operates and its future projections, and the

alignment of that with the products/services the business produces. Key

questions include the market size and growth, technological advancement,

market trends, regulatory environment, barriers to competitor entry, time

scale for ROI, etc. Businesses rated positive or strong should be able to

demonstrate there will be sustainable demand for their product/service, or if

a fast cycle is expected (e.g. fashion manufacturing, consumer electronics)

the speed and quantum related to obtaining a satisfactory ROI is aligned

with market realities. Where this cannot be demonstrated or unquantified

risks are present (such as new technologies that could leapfrog the current

business model or dependence on a key issue that may change (such as a

regulation, tax or tariff treatment, personal relationship etc) the business

should receive a negative/poor rating



Ease of replication

Track record

Scalability


1

2

3

4

5

6

7

Robustness

✓

1 - Poor

• There is very significant risk that the market may change, negatively impacting future prosects

2 - Negative

• There is a real risk that the market for the products/services could change and this may have a negative effect

3 - Neutral

• The risks and assurances related to the future market for the products/services are in balance

4 - Positive

• The market outlook for the products/services is generally positive

5 - Strong

• There is a robust and demonstrated market for the products/services produced with little chance this will change

Rating on 1-5 Scale

The SLC Matrix is simple but flexible, and a powerful tool if used systematically

Methodology

1. Gather Data

Undertake research to obtain objective

data relevant to each of the 7 key

attributes

2. Adjust Attribute Weighting

Decide on the relative importance of each attribute for the particular case

On a 1-5 scale default (neutral) is 3 but each attribute

may be over- or under-weighted by

2 points

3. Apply Scoring

Score each attribute based on the data

collected, as objectively and consistently as

possible

4. Tabulate and Determine Final Rating

Complete the matrix, calculate

the total score and determine final

rating

5. Populate Summary Report

Produce summary report or additional

materials as required

The relative importance of each attribute can be adjusted on a case by case basis

Attribute Weighting

Attribute 1 2 3 4 5

Proprietary assets

Attrib

ute is u

nim

po

rtant in

this

particu

lar case

Attrib

ute is relatively less

imp

ortan

t in th

is particu

lar case

Defau

lt Positio

nA

ttribu

ten

eith

er over-

or u

nd

er-

weigh

ted

Attrib

ute is relatively m

ore

imp

ortan

t in th

is particu

lar case

Stron

glyo

ver-weigh

tA

ttribu

te is critical in th

is p

articular case

Track record

Robustness

Scalability

Ease of replication



To ensure the model if flexible and can cater for a range of different scenarios, each attribute can be under- or over-

weighted by 2 points above or below the median/neutral of 3

STRONGLY

UNDER

WEIGHT

UNDER

WEIGHT

NEUTRAL OVER

WEIGHT

STRONGLY

UNDER

WEIGHT

Proprietary assets


Ease of replication

Track record

Scalability


1

2

3

4

5

6

7

Robustness

1. Grade the importance of each attribute on a 5-point scale

2. Arrive at score according to individual and specific circumstances

of the company or market to identify which attributes are more and

less important than others in this particular case

Attribute Weighting Worksheet

StronglyUnder Weight

1

Under Weight

2

Neutral

3

Over Weight

4

Strongly Over Weight

5

Allows for the 7 key attributes to be weighted on a 1-5 scale to

accommodate specific circumstances

Each key attribute is graded on a 1-5 scale as objectively as possible depending on

how important this particular attribute is for the particular circumstances

Each of the 7 key attributes is scored according to the objective analysis of the data

provided and observations of the research team

Attribute Score

Attribute 1 2 3 4 5

Proprietary assets

The co

mp

any is stro

ngly

disad

vantaged

on

this attrib

ute

The

com

pan

y is disad

vantaged

on

this

attribu

te

The

com

pan

y is ne

ither m

aterially ad

vantaged

no

r disad

vantaged

on

this

attribu

te

The co

mp

any is p

laced at an

ad

vantage o

n th

isattrib

ute

The co

mp

any is stro

ngly ad

vantaged

o

n th

is attribu

te

Track record

Robustness

Scalability

Ease of replication



Using a 5 point scale and the guidance provided within the template, each attribute is scored with 3 representing

neutral

STRONGPOOR WEAK NEUTRAL POSITIVE

Proprietary assets


Ease of replication

Track record

Scalability


1

2

3

4

5

6

7

Robustness

1. Based on data and observation, grade the business on the 1-5

scale according to the guidelines set out in the summary of each

attribute

Attribute Score Worksheet

Poor

1

Negative

2

Neutral

3

Positive

4

Strong

5

Allows for the 7 key attributes to be scored on a 1-5 scale as objectively as

possible

Each key attribute is graded on a 1-5 scale as objectively as possible according to the guidelines laid out in the summary of each

attribute

E

1. Enter the weighting for each attribute and the score given on a 1-5 scale

2. Add weighting and attribute score and total the two scores for each attribute to derive

final SLC Total

Consolidation

Attribute Weighting Score Weighting + Score

Proprietary assets 4 5 9

Track record 3 2 5

Robustness 3 3 6

Scalability 2 3 5

Ease of replication 3 3 6

Risk of being copied 4 2 6

Market sustainability 5 4 9

SLC Total 46

Example

Add the weighting and score for each attribute and total the sum of all measures

Final SLC Rating

Each of the 7 attributes may be scored from 1 (low) to 5 (high) resulting in the possible spread of scores 7-35 with a

mid point of 21.

Each attribute is also weighted for importance on the same basis.

The blended total therefore has a potential spread of 14 – 70 with 42 being the neutral mid point.

Poor

Negative

Neutral

Positive

Strong

Low level of confidence High level of confidence

24 or Lower 61 or Higher49-6036-4825-35

Add the weighting and score for each attribute and total the sum of all measures

Analysis of SLC Rating

Analysis of the capability of the

business to deliver on the key attributes that are likely to determine success indicates a low

level of correlation.

The level of confidence in the business being able to successfully

deliver on its objectives is low and this is likely

to be driven by multiple factors.

Extreme caution is advised and fundamental

changes need to be undertaken or

the concept abandoned

Poor


business to deliver on the key attributes that are likely to determine

success indicates a level of correlation that

is negative to some extent


deliver on its objectives is negative however

this may be mitigated if the specific factors

were addressed to a satisfactory level.

Caution is advised and a number of issues should be addressed before

proceeding

Negative

Analysis of the capability of the business to deliver on the key attributes that

are likely to determine success indicates neither

strong positive or negative correlation

Level of confidence in the business successfully

delivering on its objectives is neutral indicating the absence of significant

negative factors, but also the possible lack of any

compelling positive factors.

Less caution is required with

reasonable levels of confidence being

justified . Efforts can focus on identifying and building greater

confidence in the positive attributes

Neutral


business to deliver on the key attributes that are likely to determine

success indicates a positive level of

correlation


deliver on its objectives is positive.

There is clear reason for confidence

although it would be wise to guard

against over-confidence

Positive


business to deliver on the key attributes that are likely to determine success indicates a very high level of correlation


deliver on its objectives is very strong and

compelling.

There is good reason to have

significant confidence in the

likelihood the objectives will be

met

Strong

About the Author

David Christensen resides in, Bangkok, Thailand and has an extensive

career as a Management Consultant and Senior Executive within

multinational corporations spanning the Asia Pacific region.

Specializing in corporate strategy, capital raising and market entry projects,

he has undertaken assignments that have included working in China, Hong

Kong, Taiwan, Japan, South Korea, India, Singapore, Thailand, and the

Russian Federation as well as Australasia.

He was a Partner with Gravitas Partnership based in Hong Kong and his

corporate experience has included regional senior executive roles within

American Express, Carlson Wagonlit Travel, Mercer, and AXA Asia Pacific.

He can be contacted by email at [email protected]; his

LinkedIn profile seen at th.linkedin.com/in/daviddchristensen/ and his

articles on a range of topics seen a www.inversionpoint.com/

Acknowledgment of Use

The SLC Matrix may be used without restriction provided appropriate

acknowledgement is made and an unlocked version of the document provided

upon request

The concepts and content contained in the SLC approach may be freely used or

adapted for use without restriction or prior approval provided appropriate

acknowledgment if given to the author.

In undertaking valuation exercises or analysing the future potential of business

entities for a variety of reasons, no two situations are exactly the same as there are so

many differing variables.

However the common lack of any form of systematic framework or methodology for

assessing the future potential of a business can often place too much emphasis on

historic data, or to use pure financial data as the primary criteria – neither of which

may give a full picture.

Use of the SLC Matrix, or developing a more focused approach using SLC as a base,

will in many cases assist those involved in being able to see more clearly out of the

front window of the vehicle they are driving, rather than attempting to drive forward,

while looking in the rear view mirror!

Please contact the author if you have any further questions or comments.

An unlocked version of this PowerPoint document will be provided upon request.

[email protected]

Background and ThanksThe SLC Matrix may be used without restriction provided appropriate

acknowledgement is made

Why was the SLC Matrix developed?

Both as a consultant and as a senior line manager within multinational

corporations, I have regularly faced the same dilemma – how do I find a way

to put some process or objective rigor into the analysis of the future potential

of a business, or a business unit, or even an idea that is proposed for future

development – when historical information isn’t appropriate or sufficient to

adequately predict the likely future outcome.

To some people, this is intuitive (often these make the best entrepreneurs),

but it is very difficult to replicate this. To others, intuition becomes blurred with

ego and personal perspectives and assessments are made on a

preconceived set of assumptions that may or may not be correct. Others may

adopt a more cautious view and discount anything but past and present

financial data, and thus run the risk of failing to capture opportunities. Some

people come from the school that if they trust the people involved, that is all

that is necessary and others have formed the view through experience that it’s

a lottery and some things work and some don’t – so there isn’t much that can

be done other than a calculated risk.

None of these views satisfied me, as each had a propensity to either for

higher than acceptable risk exposure through failing to adequately address

risks, or to lead to a more conservative analysis than was really necessary,

leading to the likelihood that opportunities could be overlooked.

For this reason the SLC matrix was developed as a means to provide some

greater rigor and framework for at least asking the right questions, leading to

hopefully a more reliable and robust outcome and decision. I hope this

experience resonates with other managers and advisers and the approach is

useful.

Personal Acknowledgments

I would like to acknowledge:

Jamie Donaldson of McNeill & Partners, Hong Kong, for the many

projects we worked on together, and his demonstration of rigorous

financial disciplines, systematic process, tenacity and reliability. Mike

Blackburn of Gravitas Partnership, Beijing, who is the best example I

know of the “intuitive” business decision-maker and his demonstration

of the ideal application of experience and sound judgement. Terry

Mezger of Deloitte in Hong Kong and John O’Rorke, Steve Kean and

Graham Morris formerly of Towers Watson in Hong Kong who all

demonstrated the importance of rigorous and logical methodology in

addressing complex business issues. Eve Patton of Asia Biotech in

Hong Kong who showed the importance of understanding future market

trends, long term planning and strategy, patience, and the perspective

of the private equity investor. Tom Thomson of Pacific CrossHealth

Insurance in Thailand for demonstrating the importance of pragmatic

strategies and actions and balancing immediate needs with longer term

strategies. Peter Kennerley of Melbourne for demonstrating the value

of systematic processes in developing strategy and the need to

constantly challenge assumptions. Gary Bennett of New York Life in

Mexico for his demonstration that it is the motivation, capability and

engagement of people that ultimately determines whether a strategy

succeeds or not, and finally Simon Christensen from Microsoft who

has demonstrated through excellence in software engineering that

rigorous and systematic process does not necessarily stifle creativity

but in fact may allow it to flourish and Anneliese Christensen who

demonstrates the over-riding importance of living a principle-centred

life, and whose pic kissing me at her 21st birthday party remains my

favou

strategic level of confidence valuation method

Business

business valuation

growing business

pasta business

successful local business

future prospects

future growth prospects

future profi

new products