Entrepreneurial Finance Requires Mastery of Basic Arithmetic
Many people talk themselves out of pursuing acquisitions oriented growth strategies, such as those described in The Tycoon Playbook, because they fear that one has to be a financial engineering genius with an MBA from the University of Chicago to succeed. It’s simply not true. My interest has always been in what I have come to call “entrepreneurial finance.” If you have mastered basic arithmetic you can do entrepreneurial finance.
I developed a suspicion that most of college finance was irrelevant to business shortly after college where I took finance courses. This suspicion was confirmed a short time later by a friend who was hired as an analyst by one of the biggest real estate development firms in North America. When he offered to crunch the DCF, NPV, and IRR numbers, his boss took him aside and told him that they didn’t use those calculations.
This morning I stumbled across an excellent article dealing with this by a Forbes contributor, Brett Nelson. Now normally whenever I see a Top Ten list* I expect a lame article that merely recycles material that has been posted online thousands of times before. However, this time I was pleasantly surprised. This Top Ten is loaded with good information. The one that caught my eye is an anonymous quote by a friend of Brett’s:
If You Don’t End Up Working At Goldman Sachs, Forget What You Learned About Finance
“In a 12-year finance career with large respected companies (General Electric, Honeywell, BASF), I can count on two hands the number of IRR (internal rate of return), DCF (discounted cash flow) and NPV (net present value) analyses I have completed, and I am pretty sure that I analyzed exponentially more balance sheets in a classroom than I ever have in a boardroom. It is obviously important to be fluent in the language of finance, but as for the finance majors I hire (graduate and undergrad alike), I spend the first year or two retraining them. (source)
Most of the buyers and sellers of businesses I have worked with over the years would have needed to Google the exact formulas for NPV, IRR, and DCF before they could use them.
If you can deduct after purchase debt service payments from ODCF or EBITDA, you can handle the sophisticated arithmetic required by the small business acquisition game.
* Top Ten lists are a tired old gimmick done to death by people who write online when they need to crank out some filler material quickly. I am guilty of doing them about once a year myself. We will never see the end of these lists because the mind wants to believe that complex endeavors can be handled with a simple list of ten rules.