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Business valuation is the foundation of our investment approach. We believe in looking at each investment as if we were owners of the underlying business. It’s not a coincidence that many of our clients are current and former business owners; they are familiar and comfortable with the business valuation process we employ.
For a given security, the investment selection process begins with a careful analysis of the underlying company’s financial statements to identify intrinsic value based on cash flow and asset values. The appeal of our valuation methodology is that it is company specific rather than being focused on highly unpredictable variables such as economic trends, interest rate movements or fluctuations in the overall stock market. This think-like-a-business-owner approach affords us an independent and common sense driven methodology to evaluate each investment against its prevailing market price.
Our discipline relies heavily on a realistic understanding of the discretionary cash flow from a business. This process focuses on scrutinizing the financial statements of potential investments and really getting to know a company’s operations in the same way that a business owner would if he or she was running a sole proprietorship. The key is cash flow. After all, when one owns a business, it’s the operating cash flow or free cash flow that the business owner gets to keep. By understanding intimately the operations and profit power embedded within a company, the ability to attach a fair – and independent – price becomes truly ascertainable.
The business owner mind set forms the basis for our buy and sell discipline used in our wealth management and investment management process.
Why is this approach so unique?
All too often, investors will buy a stock simply because they think the product is revolutionary or they like the company. While these issues have important pieces of the puzzle, they tell you nothing about what the company is worth. Yet knowing what a company is worth is what enables wise investors to know when a stock is inexpensive.
By ignoring intrinsic worth as defined by future cash flow, investors open themselves up to considerable downside risk. We rigorously analyze a company’s cash flows to come up with an assessment of value to not only grow capital, but to protect it from being lost.
Just buying a presumably “good” business isn’t enough. When you sink investment capital into a business you want to see a reasonable return for the risk you are assuming.
This approach of employing business valuation provides us with a healthy degree of independence from the market. Over the long-run, the market is generally efficient, but in the short-term certain factors can have a profound effect on a stock’s price. The market’s reaction to short-term events can produce large swings in the stock price that are unrelated to the long-term prospects of the business, and mis-pricings occur. We seek to capitalize on these opportunities and are content to wait patiently until the market ultimately reflects our estimate of worth.
This business valuation methodology forms the basis of capital preservation, income, and long-term growth wealth management strategies we provide for clients.
Talk to us and learn why we are a sensible choice to providing intelligent investing. Pick up the phone and call us at 800-592-7534.
Additional Resources
Over the years we have worked with strategic partners when assisting a business owner client with the process of valuing and selling a business. If you are a business owner who is looking to learn more about corporate finance or exit and growth strategies visit Evergreen Capital LLC.
To learn about corporate structure, business agreements, mergers and acquisitions as well as business and corporate law matters, visit Offit Kurman Attorneys at Law.
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