The Value Equation: A Business Guide to Creating Wealth for Entrepreneurs, Investors and Leaders
“Chris Volk is a walking, talking Capital Asset Pricing Model ― only better. He’s a rare combination of successful entrepreneur and talented teacher. This book is a gift for anyone interested in business, from start-up dreamer to seasoned executive.” – R. Ted Weschler Investment Manager, Berkshire Hathaway
Christopher H. Volk, Co-Founder of three successful companies, including STORE Capital where he served as CEO and the Executive Chairman, uses his experience and expertise to create an informative and concise guidebook to corporate finance for business owners and entrepreneurs.
The Value Equation highlights key examples and explanations on how business works to best provide wealth for entrepreneurs and investors, with Volk’s signature wealth creation formula embedded throughout, helping simplify complex subjects. Volk’s illustration of case studies that highlight crucial business and financial concepts allows for a deeper exploration of corporate finance, including advice on business assembly and mergers, and guidance on business models. This text is a critical addition to any entrepreneur’s library.
Here is an extract from The Value Equation: A Business Guide to Creating Wealth for Entrepreneurs, Investors and Leaders by Christopher H. Volk.
To my way of thinking, the real action in business lies in the middle markets, which I would characterize as companies having from $10 million to $1 billion in revenues. This is where most of the job growth and business creativity is in the United States. This is the most common fertile ground for growing businesses that have the best chances for material wealth creation.
To be among the broad group of thousands of middle-market businesses is broadly attainable.
By contrast, smaller companies often serve as vehicles for independent employment, which can be personally rewarding but generally lessen the chances for wealth creation.
The bottom line is this: If you can harness an idea and transform it into a business model, what are the odds of success?
It turns out that the odds of having a business that survives at least five years are about the same as the odds of consistently breaking 100 at golf. The odds of business survival for longer than 10 years are somewhat better than regularly posting golf scores under 90.
Golf vs. Business
|50% Can’t Break 100||20% Don’t survive a year|
|25% Shoot between 90 and 100||50% Survive at least five years|
|20% Shoot between 80 and 90||33% Survive more than 10 years|
|5% Shoot below 80||?? Survive and create MVA|
Actually, the odds may be about the same, since golf statistics are based upon players who report their scores. Of course, many golfers elect not to report their scores, while among those who do report their scores, there are well-founded suspicions of score embellishment.
In business, there are generally no free mulligans, and statistics are not compiled from self-reporting, which makes reported business survival rates more reliable.
Businesses that survive 10 or more years are apt to have better business models than those who do not. The outliers in business are the companies that do two things: They survive; and then having survived, they become worth more than they cost to create.
These characteristics lie at the heart of wealth creation. The aggregate creation of value beyond the cost to create a company is called market value added (MVA). A company’s owners tend to be the prime beneficiaries of MVA, though creditors also typically benefit. The principal driver of MVA creation is centered in the ability of a business to realize rates of return that exceed the overall cost of capital, which includes both equity and interest-costing proceeds from other people and institutions.
At an extreme level, outlier businesses can enable their shareholders to become unicorns. I expect that most of the founders of such rarified companies end up as surprised as Sergey Brin and Larry Page. But there are thousands of MVA-creating businesses that individually and collectively lie at the center of our economy and the prosperity of our communities.
The six variables
While there is a limitless supply of ideas that might be applicable to business formation, there is not, at a high level, a limitless supply of business models. When viewed abstractly, just Six Variables combine to deliver equity returns and create equity market value added. They are:
- Business investment
- Operating profit margin
- Amount of interest costing proceeds (other people’s money)
- Cost of OPM
- Annual maintenance capital expense
This is not to say that buried within the Six Variables lie far more diverse operational fundamentals. Henry Ford created the first scalable automotive assembly line, and Albert P. Sloan was an administrative and marketing genius who grew General Motors to surpass Ford and become the largest company in the world. These and other operationally-minded business leaders are illustrative of the immense creativity that can be harnessed to enhance business models. Still, behind all this effort and operational creativity lie Six Variables, which demand the attention of—and can help—every business leader.
Excerpted with permission from the publisher, Wiley, from The Value Equation by Christopher H. Volk. Copyright © 2022 by John Wiley & Sons, Inc. All rights reserved.Buy Now