Hands up anyone who has received a full copy of an asset valuation model going into consignment? Hands up anyone who has been able to validate if the model was realistic? The norm is few enough for the former and even less for the latter.
Despite this, models have been used as a central part of the decision-making process, not because they have been fully understood but rather that the forecasted figure was a line in the sand, and let’s be honest it also represented a stick with which to give the consignee a hard time. Today the model represents even less of a “line in the sand”, and if you are still looking for that stick then you already going down the wrong route in getting the most value for your investor(s).
It’s time to accept that you don’t need the full model, it won’t give you the information you want, the data has conflict of interest written all over it, and you probably won’t get it anyway. The model is critical IP to the consignee and they will work hard to protect it – this means that whatever you get is incomplete, open to interpretation, and at the end of the day will only give you a value and a timeframe that is at best highly dynamic, and at worst just created to win the consignment.
Sounds like we’re back to what can you control. Through Mirror Partnering you have already established the right consignee to work with from both a company and asset perspective. It’s now time to deepen the relationship.
Elucidate. Now that your consignee understands that your primary focus will be around ensuring the right processes, structures, and systems, are in place to get the best return, the focus turns to getting a model that best supports those processes, structures and systems. With the model not being a potential conflict of interest, or at least less of one, a lot more can be achieved through the model;
· If your investor’s priority is value then getting various scenarios in terms of the optimal timeframes to achieve it is important. The timing at which your Tier 1 material will be sold in today’s market will have a direct bearing on the price at which the material, impact is less as you down through the Tiers.
· If your investor’s priority is timeframe then getting clarity on what can be achieved in different timeframe contexts will support the decision-making process.
· Honestly clarifying the minimum target on both of those, while communicating that the output has to be about what is real, will allow for more acute strategizing and re-enforce earlier messaging about creating that win-win scenario, something that will become clearer in the article on Contracting Plus.
Now that the consignee understands that the end figure will not determine who gets the consignment, and has clear direction on what model data output is required, internal clarity at the consignor, easier upward financial reporting through to investor, and an optimal decision-making process is achievable.
Investigate. Now the process becomes more a process of understanding, not so much one of checking to try and catch the consignee out. Items up for discussion now include;
· The premise upon which the model was built and the changes that have taken place from pre-pandemic, to in pandemic, to post pandemic.
· How have elements such as pricing, demand level, component repair profile, revenue timeframe changed? Which feeds into harvest list, repair investment, program cash flow, among others.
· The min-max picture, and what can the two of you control to move towards max.?
· Geographic reach, market reach, parallel marketing options, routes to market and more?
· How is the model being impacted by conflicting consignment(s) that the consignee has – or may have in the short to medium term?
Formulate. Is all about agreeing on how the model output data transforms into optimal structures, systems and processes for the optimisation of performance.
Next edition will talk about Contracting Plus and how to put an agreement in place to achieve a win-win outcome.
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