THE VALUE EQUATION

In this financial guide, an investment entrepreneur offers a framework for business wealth creation.

Volk began in banking and took three companies, two of which he co-founded, public. Correctly observing that “shareholder wealth creation is the single most important corporate financial performance metric,” he explores a model that helps entrepreneurs and business leaders learn how to produce that wealth. In what amounts to a polished financial textbook, the author provides historical context regarding monetary concepts as well as specifics for how to proceed, ultimately revealing a useful “Value Equation” that takes into account six key variables. Volk begins with the compelling tale of Larry Page and Sergey Brin, the founders of Google, to illustrate the wealth creation possibilities of a business based on a winning idea. Volk employs contemporary business cases that dramatize how a strong model can overcome even the most stunning deficiencies. One captivating story, for example, is FUBU, a maker of branded clothing established in Daymond John’s home. Denied a bank loan 26 times, John and his mother used a house mortgage to fund the business. When his company had plenty of orders but was almost broke due to cash flow issues, John was finally able to secure financing, and 25 years later, he turned the operation into a $6 billion business. Compelling anecdotes such as FUBU’s add relevancy and liveliness to a book that otherwise concentrates on financial principles.

In pondering what makes a successful business model, Volk proposes that it basically involves “just Six Variables.” They are: “1. Sales 2. Business investment 3. Operating profit margin 4. Amount of interest costing proceeds (other people’s money) 5. Cost of other people’s money 6. Annual maintenance capital expense.” These variables are discussed in considerable detail in the remainder of the volume. With authority and clarity, the author walks readers through each of them, citing business cases as well as examples from his own experience and offering explanations in the lucid text. The variables are most often accompanied by financial formulas that are more engaging than one might imagine. For instance, “Mort’s Model,” which illustrates cost of capital versus cost of equity, was created by Mort Fleischer, Volk’s business partner; it humorously incorporates a Yiddish term that represents “Other People’s Money.” The author wisely converts the generalized formulas into specifics; he uses a restaurant case study throughout the book because, he says, this type of business model is relatively uncomplicated. The heart of the work is “The V-Formula,” the Value Equation developed by Volk in 1999. He deftly demonstrates the applicability and flexibility of this formula in numerous iterations, using the restaurant case study as well as the example of a real estate financing company he co-founded. The accompanying data tables make it easier to comprehend the formula in action. Volk also includes sound background material, providing a general discussion of how public companies function financially, differences in stock markets, and mergers and acquisitions, liberally referencing experts on these subjects. But this work is primarily an in-depth financial examination of business wealth creation.

A comprehensive and cogent exploration of financial principles.