CEPA Terms Exam Questions And Answers

5-4-3-2-1 Grouping - ANS 5 Stages of Value Maturity 4 Intangible Capitals 3 Gates, 3 Gaps, 3 Legs of the Stool 2 Concurrent Paths 1 Goal-Value! 5 Stages of Value Maturity - ANS Organized as building blocks with #5 representing the most mature stage of the process: IBM-HP 1) Identify Value -Identify and assess what we have in terms of business value -In the Discover Gate 2) Protect Value -in the Prepare Gate -Done through De-Risking tasks? 3) Build Value -In the Prepare Gate 4) Harvest Value -This is actually exiting the business and harvesting the wealth you've created in the business -In the Decide Gate 5) Manage Value -Floats around the entire methodology because you 4 Intangible Capitals - ANS -These items drive business value. -80% of the value of the business is encompassed in these 4 intangibles -H.S.C.S. 1) Human Capital 2) Social Capital -Culture 3) Customer Capital 4) Structural Capital -Processes and procedures documented and written down -People -Technology -Facilities 3 Gates of the Value Acceleration Methodology - ANS 1) Discover -What we do in this gate: 1. Conduct the Triggering event -Identify Value (Stage 1 of the 5 stages of value maturity) -Through the triggering event, we are identifying how attractive and ready our business is to determine what its value is. 2. We are measuring and identifying the 4 C's 3. We are identifying all 3 Gaps -2 Deliverables 1. The Triggering Event 2. The Prioritized Action Plan (created, not running it yet) 2) Prepare -Filling the 3 Gaps -Working on the 4 C's -We are Protecting and Building Value (Stages 2 & 3 of the stages of value maturity) -Running 2 concurrent paths, Vision (personal) and Mitigating Risk (business) paths, every 90 days -Deliver action plans -90 Day sprints -3 Deliverables: 1. Master Plan 2. Validation 3. Big Rocks (No more than 5 business action items and 5 personal action items) 3) Decide -Ask the question: "Do I keep the business or do I sell the business?" -Harvest Value (stage 4 of the stages of value maturity) -Execute Exit options -If you answer Keep: 1. Go back to the Prepare Gate and do another 90-day sprint 3 Legs of the Stool - ANS 1) Business 2) Personal 3) Personal Financial 3 Gaps - ANS All of these things together can be referred to as the "Master Plan" or "Organizing Principle" 1) Wealth Gap -Personal Gap 2) Profit Gap -Business Gap 3) Value Gap -Business Gap - 2 Concurrent Paths - ANS In the Prepare Gate, these two paths are being worked on together: 1) Personal and Financial Legs of the Stool = Vision Path 2) Business Leg = De-Risking/Mitigating risk path Range of Value (ROV) - ANS Attractiveness and Readiness (ANR or ANR Score) - ANS Measured through Common Sense Scoring Scale (1-6 points per question) Common Sense Scoring Scale - ANS -Used during the triggering event assessment that scores each question from 1-6 points. -There is no average, each question answer has to be either above average or below average. Personal Preparedness/Personal Readiness - ANS Profit Gap - ANS Potential Profit (Best in Class Profit) - Current Profit (Recasted EBITDA)= Profit Gap Best in Class Profit = Best in Class EBITDA % x Current Revenue of the Company OR (Best In Class EBITDA % x Revenue of Company) - Recasted EBITDA of company = Profit Gap -To do this, you need to know the Best in Class EBITDA as a percent to revenue/sales, and the current EBITDA as a percent to revenue/sales for the company. - Value Gap - ANS Potential Value of the business (Best in Class Value) - Current Value of the business = Value Gap Best in Class Value = Best in Class Profit x Best in Class Multiple - Current Value of the Company -To do this equation, you need to know the Recasted EBITDA and the Multiple for the companty. Triggering Event - ANS A Personal, Financial, and Business Assessment correlated to the business Range of Value. -Is the first deliverable of Gate 1 and of the entire methodology -Also called Enterprise Value Assessment (EVA), Discovery, or an Opinion of Value -Benefits include: 1. Establishes the current biz value and the Best in Class value (potentially) 2. Predicts the probability of succeeding with growth and transition strategies 3. Identifies the Profit Gap and the Value Gap 4. Identifies the actions needed to protect, build, and harvest value 5. Triggers action! -Steps: (Chapter 10) 1. Recasting the financials (Adjusted or Normalize financials) -Tangible assets adjusted to market value upon transfer Strategic Value = Simple Math Formula - ANS It's 2 formulas: 1) Recasted EBITDA X Multiple = Value 2) Recasted Sales X Multiple = Value 4 Types of Adjustments to do in Recasting - ANS 1) Standard Adjustments allow us to move from Net Income to EBITDA -adjust interest, taxes, depreciation, amortization 2) Normalize -Salaries, rent (especially if the owner owns the real estate), and bonuses 3) Discretionary Expenses -Personal in nature and benefit the owner and/or employees but not really for the business (Company cars, travel expenses, real estate, fake employees) 4) One-Time Non-recurring charges -write offs, legal expenses, consulting Attractiveness Score - ANS How attractive the business is from a 3rd party point of view Readiness Score - ANS How ready the owner and the business are to transition and scale The 3 Legs of the Stool - ANS 1) Maximizing the value of your business 2) Ensuring you're personally and financially prepared 3) Ensuring you have planned for the 3rd act of your life (post-sale life) What is Exit Planning? (Chris Snider's Definition) - ANS Combines the plan, concept, effort and process into a clear, simple, strategy to build a business that is transferable through strong Human, Structural, Customer, and Social Capital. The future of you, your family, and your business is addressed by focusing on creating value today