Effective Business Valuation 113Understanding all of this information helps put the manage-
ment factor in perspective so you can analyze and discuss the key
considerations in assessing the quality of management in a business.
The next list is by no means exhaustive but it offers the most com-
pelling considerations in “ valuing ” the management. In no order
of importance, when investigating management, investors ought to
give serious consideration to:- Management ownership of stock
- Compensation structure of top management
- Qualifications and experience
- Operating results report card
Eating Their Own Cooking
Not many people would visit a restaurant if they discovered that
the head chef was dining elsewhere. The same standard should
be applied to our corporate “ chefs. ” Nothing is more indicative
of complete alignment of interest with shareholders than mean-
ingful ownership of company stock. The proper way to determine
whether ownership is meaningful is based on percentage of net
worth represented by the underlying stock as well as the considera-
tion paid for the stock.
Looking at percentage of net worth represented by stock own-
ership versus percentage of company owned is more meaningful
especially when large companies are involved. If an executive is
earning $ 10 million a year running a $ 100 billion company, own-
ing 0.1 percent ( $ 100 million) of the company can be very mean-
ingful if it represents a signifi cant portion of his or her net worth.
Focusing on percentage of net worth represented by stock own-
ership allows for an apples - to - apples comparison when compar-
ing management at large companies to those from smaller ones.
The exception to this rule is if the CEO is a founder or other indi-
vidual tightly associated with the business. For instance, MichaelCH006.indd 113CH006.indd 113 9/2/09 6:58:09 PM9/2/09 6:58:09 PM