Strategic Level of Confidence Matrix

Objective process providing level of confidence in assessing future growth potential of business entities for investment or prioritization of investment purposes

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

Where the future of the business may look very different from the past
A 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 another

The 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 unique

The 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 person
A 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?

The Process
Future growth prospects for a business can be a matter of opinion
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 + intangible assets.

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

Strategic Plan for the business will make certain projections and assumptions

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 provides a way to validate the future growth potential

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

7 Key Drivers
The ability of a business to grow and sustain new levels of revenue (not including acquisition) is highly dependent on 7 key attributes

1 2 3 4 5

Proprietary assets

Track record
Robustness Scalability Ease of replication Risk of being copied Market sustainability

6
7

Key Attribute #1
Proprietary Assets

1 2 3 4 5 6
Proprietary assets Track record Robustness Scalability Ease of replication Risk of being copied Market sustainability

The Attribute
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).

5 - Strong 4 - Positive 3 - Neutral 2 - Negative

Proprietary assets neutral providing neither advantage nor disadvantage Proprietary assets strong and sustainable and provide robust long term business advantage

Some or all proprietary assets strong and confer business advantage

1 - Poor
Business has no appreciable proprietary assets

Minor or fragile proprietary assets

Rating on 1-5 Scale

Key Attribute #2
Track Record
1
Proprietary assets Track record Robustness Scalability Ease of replication Risk of being copied Market sustainability

The Attribute
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.

2 3 4 5 6

5 - Strong 4 - Positive 3 - Neutral 2 - Negative

Track record neutral past performance neither adds nor detracts from likelihood of future delivery Strong track record in successful delivery of similar objectives

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

1 - Poor
Business unable to show previous successful delivery of objectives requiring similar skills

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

Rating on 1-5 Scale

Key Attribute #3
Robustness
1 2
Proprietary assets Track record Robustness Scalability Ease of replication Risk of being copied Market sustainability

The Attribute
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.

3 4 5 6

5 - Strong 4 - Positive 3 - Neutral 2 - Negative 1 - Poor

Future plans are highly dependant on a number of assumptions with few or no alternatives Some risk exists owing to the dependency on certain assumptions The business is balanced in terms of robustness with this attribute neither strong nor weak The risk of any unforseen circumstance has little likelihood of negatively impacting the delivery of future plans

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

Rating on 1-5 Scale

Key Attribute #4
Scalability
1 2 3

The Attribute
Proprietary assets Track record Robustness Scalability Ease of replication Risk of being copied Market sustainability 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..

4 5 6

5 - Strong 4 - Positive 3 - Neutral

Business scalable without major impediment and moderate benefit possible Clear scalability with demonstrable benefit to be obtained with relative certainty

2 - Negative

1 - Poor
Significant capacity constraints, other growth impediments or large capital investments required

Some capacity constraints or other impediments including potential for capital investment

No significant impediments to scale but no clear benefit either

Rating on 1-5 Scale

Key Attribute #5
Ease of Replication
1 2 3 4
Proprietary assets Track record Robustness Scalability Ease of replication Risk of being copied Market sustainability

The Attribute
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.

5 6

5 - Strong 4 - Positive 3 - Neutral 2 - Negative

Replication is irrelevant as a driver of growth, or the business has no clear advantage or disadvantage in this regard Replication will be a significant growth driver and the business is strongly positioned for this to occur with expectation of success

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

1 - Poor
Growth requires replication but unique attributes make this difficult to achieve

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

Rating on 1-5 Scale

Key Attribute #6
Risk of Being Copied
1 2 3 4 5
Proprietary assets Track record Robustness Scalability Ease of replication Risk of being copied Market sustainability

The Attribute
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. .

5 - Strong 4 - Positive 3 - Neutral 2 - Negative 1 - Poor

Few impediments exist to prevent competitors copying or improving the business model There is some risk of competitors being able to copy or improve on the business model This attribute is either of low significance or the risk of being copied is neutral The business has strong protections or uniqueness and is well insulated from the risk of being copied

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

Rating on 1-5 Scale

Key Attribute #7
Market Sustainability
1 2 3 4 5 6
Proprietary assets Track record Robustness Scalability Ease of replication Risk of being copied Market sustainability

The Attribute
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

5 - Strong 4 - Positive 3 - Neutral

The market outlook for the products/services is generally positive There is a robust and demonstrated market for the products/services produced with little chance this will change

2 - Negative

1 - Poor
There is very significant risk that the market may change, negatively impacting future prosects

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

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

Rating on 1-5 Scale

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

1. Gather Data 2. Adjust Attribute Weighting

3. Apply Scoring
Decide on the 4. Tabulate and Determine Final Undertake research relative importance to obtain objective of each attribute for Rating data relevant to 5. Populate the particular case each of the 7 key Summary Report Score each attribute On a 1-5 scale attributes default (neutral) is 3 based on the data collected, as but each attribute Complete the objectively and may be over- or matrix, calculate consistently as under-weighted by the total score and possible 2 points Produce summary determine final report or additional rating materials as required

Attribute Weighting
The relative importance of each attribute can be adjusted on a case by case basis
To ensure the model if flexible and can cater for a range of different scenarios, each attribute can be under- or overweighted by 2 points above or below the median/neutral of 3

Attribute Proprietary assets Track record

1
STRONGLY UNDER WEIGHT

2
UNDER WEIGHT

3
NEUTRAL

4
OVER WEIGHT

5
STRONGLY UNDER WEIGHT

Default Position Attribute neither over- or underweighted

Attribute is relatively less important in this particular case

Attribute is relatively more important in this particular case

Attribute is unimportant in this particular case

Robustness
Scalability Ease of replication Risk of being copied Market sustainability

Strongly over-weight Attribute is critical in this particular case

Attribute Weighting Worksheet

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

Strongly Under Weight 1

Under Weight
2

Neutral
3

Over Weight
4

Strongly Over Weight 5

1 2 3 4

Proprietary assets Track record Robustness Scalability Ease of replication Risk of being copied

5
6 7

Market sustainability

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

Attribute Score

Each of the 7 key attributes is scored according to the objective analysis of the data provided and observations of the research team

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

Attribute Proprietary assets Track record

1
POOR

2
WEAK

3
NEUTRAL

4
POSITIVE

5
STRONG

The company is neither materially advantaged nor disadvantaged on this attribute

The company is disadvantaged on this attribute

The company is strongly advantaged on this attribute

The company is strongly disadvantaged on this attribute

The company is placed at an advantage on this attribute

Robustness
Scalability Ease of replication Risk of being copied Market sustainability

Attribute Score Worksheet

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

Poor
1

Negative
2

Neutral
3

Positive
4

Strong
5

1 2 3 4

Proprietary assets Track record Robustness Scalability Ease of replication Risk of being copied

5
6 7

Market sustainability

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

Consolidation

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

Example
Attribute
Proprietary assets Track record Robustness

Weighting 4 3 3

Score 5 2 3

Weighting + Score 9 5 6

Scalability
Ease of replication Risk of being copied Market sustainability

2
3 4 5 E

3
3 2 4

5
6 6 9 46

SLC Total

Final SLC Rating

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

Neutral
Negative Poor 24 or Lower
Low level of confidence

Positive Strong

25-35

36-48

49-60
High level of confidence

61 or Higher

Analysis of SLC Rating

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

Poor
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.

Negative
Analysis of the capability of the business to deliver on the key attributes that are likely to determine success indicates a level of correlation that is negative to some extent The level of confidence in the business being able to successfully deliver on its objectives is negative however this may be mitigated if the specific factors were addressed to a satisfactory level.

Neutral
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.

Positive
Analysis of the capability of the business to deliver on the key attributes that are likely to determine success indicates a positive level of correlation The level of confidence in the business being able to successfully deliver on its objectives is positive.

Strong
Analysis of the capability of the business to deliver on the key attributes that are likely to determine success indicates a very high level of correlation The level of confidence in the business being able to successfully deliver on its objectives is very strong and compelling.

Extreme caution is advised and fundamental changes need to be undertaken or the concept abandoned

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

Less caution is required with reasonable levels of confidence being justified . Efforts can focus on identifying and building greater confidence in the positive attributes

There is clear reason for confidence although it would be wise to guard against overconfidence

There is good reason to have significant confidence in the likelihood the objectives will be met

About the Author

A veteran of the Asia Pacific business scene, David Christensen is an Australian (with New Zealand roots), currently based in Bangkok, Thailand where he is CEO of premium skincare and anti aging products manufacturer Royal Siam Natural Health and Beauty. Having lived and worked in 14 countries as wide afield as Russia, India, and Japan, David has a background in advertising with Saatchi & Saatchi and DDB, extensive international business strategy consulting experience as a Partner with Gravitas Partnership in Hong Kong, and senior regional line management roles across Asia Pacific with American Express, Carlson Wagonlit, and AXA Asia Pacific. His LinkedIn profile can be seen at this link LinkedIn Profile and you can contact him by email at david@royalsiam.asia .

Royal Siam Natural Health and Beauty Royal Siam is an international manufacturer and distributor of branded skincare, haircare and related health and beauty products, with its headquarters in Bangkok, Thailand.The company specializes in the use of natural ingredients, leveraging the extensive knowledge base built up over more than 800 years by the Thai Traditional Medicine profession. In addition to this emphasis on natural and traditional ingredients, Royal Siam researches and includes some of the latest ingredients and techniques developed by modern science resulting in a range of premium skincare and anti aging products that represent world best practice in both 100% natural products as well as those that include synthetic ingredients.The company distributes its products through retail operations in Thailand and globally via and international online store, accessed at http://www.royalsiam.asia.The website of www.royalsiam.asia contains extensive resources and information about the skincare industry as well as the role Royal Siam plays within the industry.

www.royalsiam.asia

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.

david@royalsiam.asia

Background and Thanks

The 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 isnt 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 its a lottery and some things work and some dont so there isnt 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 The opportunity to work alongside, observe, and learn from a number of people in varying situations have given me the insights that have contributed to the development of the approach. I particular 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 ORorke, Steve Kean and Graham Morris 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 LMG Pacific Health 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 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