The Subjective Nature of Value: Stories Buyers Tell Themselves | An M&A Masterclass | Private Equity

It was a cool Saturday morning in Chicago. I was 22 years old and brand new to investment banking. In fact, this was my first live deal. I got up that morning, put on my three-piece suit, grabbed some donut holes and coffee, and made my way to Rogers Park on the north side of Chicago. That morning I sat down with the co-founders, Eric and Brad, and we talked about the sale of their business, Starbelly.com, to our client HA-LO Industries.

Now, Starbelly was a website that sold promotional products. You know, the types of things that get stuck in the back of closets and left behind in hotel rooms. Starbelly did $800,000 per year in revenue and had a burn rate of over $5 million a year. As we sat around the conference table that morning — me, of course, in my suit, these two adorned in jeans, T-shirts, and baseball caps, casually munching on donut holes and sipping coffee — I asked Eric. Eric had mentioned a few times that if you hold onto this, you could take this business public for over a billion dollars. Why sell it now? Eric took a sip of coffee, leaned back in his chair, and said, “Sometimes it’s better to take a risk off the table today.”

Two months later, the tech bubble burst, and HA-LO Industries collapsed under the weight of the $240 million acquisition, ultimately going bankrupt. I would subsequently be deposed and find myself in federal court answering questions such as, how could management be so stupid as to pay $240 million for a website owned by two 29-year-olds generating $800K a year in revenue? But Brad and Eric, they walked away wealthy, very wealthy. They went on to co-found multiple public companies, including Groupon, both becoming billionaires. In fact, Eric Lefkofsky found himself on the Forbes 400 list. Same market, same timing, same bubble.

Two very different outcomes. One became a billion-dollar fortune. The other ended in disaster with bankruptcy. Hi, I’m Paul Giannamore. I’m an investment banker, and I negotiate for a living. Today we’re gonna talk about valuation, and why it’s not just about the numbers. Valuation is storytelling. It’s a story buyers tell themselves about risk, about cash flow, and about the future.

Whenever a business owner asks me, “What’s my business worth?” my response is always this saying: to whom? What’s your business worth? To whom? To you, it might be worth one thing. To your cousin Eddie, who’s got no money and no capacity to pay, it’s worth something entirely different. Now, of course, the publicly traded behemoth in your industry, it might be worth something entirely different — a business that can acquire your company and capitalize on the technology that you’ve built over the years. So a business doesn’t have one value. It is not objective, it’s subjective. And beauty really is in the eye of the beholder.

When we talk about valuation — the discussion we had about HA-LO’s acquisition of Starbelly.com — I know it’s an absurd example, but it proves the point here. I mean, what sort of moron would pay $240 million for a website that had no real technology, generating $800K in revenue and losing $5 million a year? Now, I know it was at the height of the dot-com bubble, but notwithstanding. There was one reason why HA-LO paid $240 million for Starbelly.

It was because 29-year-old Brad Keywell and Eric Lefkofsky hired investment bankers, and those investment bankers scared the living shit out of HA-LO’s management team. They came in and said, “Hey, there’s this new technology, it’s the web, it’s out here, and it’s going to destroy your business. So unless you guys pay up, we’re gonna take over.” And unfortunately for HA-LO and its shareholders, management bought that line and ended up paying $240 million for that business, and it ended up in bankruptcy. Now, there was no one else on the planet who was gonna pay that. You know, Eric and Brad, of course, thought they could take that business public for a billion dollars maybe.

I mean, again, it was the height of the dot-com bubble, but there was no one else that was gonna pay 300 times revenue for a website. So that’s an example of how valuation actually is subjective, and that was ultimately a story, a narrative that the buyer told itself about risk and about cash flow. They looked at Starbelly and said, “Well, wait a second. We’ve got this old-world promotional products company” — so it’s a company that does branded trinkets, right? You know, mugs and pens with IBM or AT&T on it. They were selling them through account representatives at the corporate level. Starbelly came in and said, “Hey, we will take this, and we’ll give IBM or AT&T its own branded apparel store, so employees can log in and get themselves an IBM cup.”

HA-LO’s management team listened to this nonsense and then told themselves a story, a story about risk, and their story happened to be very, very wrong, unfortunately. So that demonstrates the subjective nature of value. So just like beauty, value really is in the eye of the beholder.

As a business owner, I want you to think about your business having a spectrum of values. At one end of this spectrum, we’ll call it the highest investment value or strategic value. This is if you went out to market in a competitive process and you were able to get full price discovery, and you ran the price all the way up to the very top — this is the highest value that this business would transact for.

So we’ll call that strategic value or investment value. At the other end of the spectrum, you know, we might have bankruptcy or liquidation value. But somewhere kind of in the middle, we have the hypothetical construct of fair market value, and there’s a million different value points in between. And I’d like to think about value as — whenever I go to a process, I take one company and I might have 30 different acquirers.

Every one of these acquirers is telling themselves a different story. They’re telling themselves stories about your business, about your capabilities, about the resources. They’re telling themselves a story about the cash flow that business will generate going forward. They’re telling themselves a story of how acquiring those capabilities — whether it be revenue, technology, so on and so forth — can help bolster their bottom line.

And they’re telling themselves a story about market conditions. Are they buying at the high end of the market? Are they buying at the low end of the market? Where are we in the greater financial environment? Every one of these buyers is telling themselves a story. As a seller, you can’t look at your business as having a going rate.

You know, what’s a sales multiple, or what’s a standard EBITDA multiple for my business? But you have to think probabilistically, and the fact that you’ve got a wide spectrum of buyers, each telling themselves their own story, determines the value of the business. Now, of course, the question is, how do you get them to pay it, right?

And so I think one of the issues that a lot of sellers have is, when they start to think about the fact that their business may have an objective value, or that there’s a going rate for their business, they start to think that, “Hey, my business is worth $25 million. It’s kind of the objective price for it, and any acquirer that’s interested should realistically pay that.”

But the reality is, again, every buyer’s telling themselves a different story. Every buyer has a different capacity to pay, right? So again, pretend for a second your business is roughly worth $25 million on the open market. Your cousin, who works at the deli down the street, he’s not somebody who’s gonna be able to buy your business.

He doesn’t have the — he might have the interest and the desire, but he doesn’t have the capacity to pay. Other acquirers — you’ve got publicly traded companies, you’ve got private equity firms. They clearly have the capacity to pay, but now you’ve gotta force them to pay the price. And you do that through a competitive process.

You know, whenever I deal with sellers or clients — ’cause I’m always on the sell side — I like to think about valuation this way. And I do use the hypothetical construct of fair market value, because fair market value basically is a value whereby neither the buyer nor the seller is under any sort of compulsion to transact, right?

And typically, buyers aren’t under a compulsion to transact, although sometimes they are. In the case of Starbelly and HA-LO, I would argue that HA-LO felt like they were compelled to buy, because if they didn’t buy, your business would disappear, be eaten up by Starbelly. So in that particular case, we could argue there was some compulsion. But usually there’s no compulsion to buy.

Sometimes there’s a compulsion to sell. You’ve got a business owner who gets sick, you’ve got somebody facing bankruptcy. You’ve got one business owner who owns one business, but she also owns another business. That business is going in the tank. She has to free up cash, so on and so forth. So if we don’t have any of these exogenous issues that’ll cause somebody to have to transact —

we’ve got a buyer, we’ve got a seller, neither under compulsion. But the buyer’s not able to create any synergies from the deal, meaning it’s a financial play. So in a hypothetical construct like fair market value, the buyer is buying the business for the quote-unquote intrinsic value of the cash flows.

So that’s what I think about from a fair market value standard perspective. And whenever I deal with sellers on the sell side, I say, “Okay, if we think about a hypothetical construct, fair market value — your business is worth,” and I’ll make this up, “you’ve got a business worth roughly $50 million, right?”

So that’s what it’s worth. That’s what it’s worth to you, the seller. So if you were to buy out a partner, if you were to take on some minority financing, it would be done at roughly a $50 million enterprise value. But I like my clients also to think about the fact that fair market value is all that they really have to sell, but that’s not what they’re going to sell for.

They’re gonna sell for the high end of the strategic value range, or the investment value range, meaning now we’re in a position where we’re talking about compulsion. So in this particular case, when I talked about HA-LO and Starbelly, HA-LO did have a compulsion to buy. I mean, I could tell you right now, Starbelly’s fair market value was nowhere near $240 million, right?

So we’ve got buyers that might have a compulsion to buy. But then we talk about synergies, right? So synergies come into the mix. And in the same way I talk to sellers about the fact that fair market value is all they really have to sell, when you think about it from a buy-side perspective — again, I’m not a buy-side guy, but if I were on the buy side and I looked at a deal and I thought, “Okay, it’s worth roughly 50 million bucks to the sellers, but for me, the acquirer, I can go in there and I can —

cut a million dollars in cost, ’cause there’s a lot of redundancies. And if I’m paying, you know, 10 times cash flow and I can cut out a million dollars from the bottom line, I’ve created $10 million in value right there. I can now cross-sell my products and services to this wider customer base, and the target —

I can take the target’s products and services and sell them with my customer base, and I might be able to create another million dollars in cash flow there, right? So now I’ve created $2 million in cash flow from the combination. And at 10 times, if that’s what these things are going for, I’ve created 20 million in value.

So now that business is worth 70 million to me. But I don’t know — is it right for me to write the check to the seller for 70 million bucks? I mean, I’m the one taking the risk. I’m the one creating — I, the buyer, I’m creating these synergies here. Why should I pay this guy $70 million for his business when it’s really only worth 50 million bucks?”

And I think that’s an important concept for buyers to think through. It’s like, okay, it’s effectively a $50 million business. How much value am I creating? And then the sell-side process is where buyer and seller out in the open market fight for that room in between, the value creation zone. So value will be created by this strategic transaction — $20 million, let’s say.

Now the fight between buyer and seller is, how much will the buyer and how much will the seller be able to extract from that transaction, of the created value from the combination? Unfortunately for buyers, particularly in buoyant markets, sellers, if they’re running a process correctly, extract the majority of the value created, right?

So on that particular deal, we might see a situation where a buyer would be forced through a competitive bidding process to pay 68, 69 million dollars for that company. And the buyer can be like, “Damn, I’m taking a lot of risk, and these guys are extracting a lot of the value that I’m creating. But at the end of the day, if I pay $69 million for this business and it’s worth at least 70 to me, I’m still creating value by doing the deal.”

And that’s some of the math that buyers do behind the scenes. Now, whenever I sit down with our clients — they come to us years in advance, typically, and they’ll say, “Hey, I’m thinking about selling my business in two years or three years. Paul, what can we do in order to prepare for the sale?” And I will tell you, 100% of the time, there are a variety of things that we can do to increase the value of the business.

Let’s say Jeff comes in and says, “Paul, I wanna sell my business in three years.” Okay, Jeff, can you run a valuation for me? Tell me what you think this is worth — worth to whom? But we’ll get to that in a minute. And then tell me areas that you think I can improve to really get the most for this business. Okay, fine. So we’ll do a preliminary evaluation.

And how we do this is we start with fair market value, right? We say, “Jeff, this is what your business is worth to you.” And let’s pretend for a second Jeff’s business is worth a hundred million bucks, right? So Jeff, the fair market value is a hundred million. This is what it’s worth to you. If we took it out to a formal sell-side process based upon what we know about the entire acquisition universe, based on what we know about the capabilities and the resources your business brings to the table —

based on what we know about the scarcity value of this asset, and effectively what this variety of acquirers could potentially do with the business — we think that the high end of the investment value range is $150 million today, right? So fair market value, a hundred million; high end of the investment value range, 150 million.

Now, as a sell-side advisor, it’s not like I’m setting the high end of the range saying, “Okay, it’ll go from a hundred to 150 million, and we’re not going to penny over one-fifty.” I use my best judgment to say, this is probably where acquirers tap off. But there are many times where we blow past that, because again, you know, if you’ve watched the sell-side masterclass, you know that we’re extremely aspirational.

So we’re setting our targets here. I’m not setting my target for 150 million. I’m setting it for 200 million. In a perfect world, we get above the one-fifty. But at the end of the day, I want my clients to understand, realistically, this is the range here. It’s probably worth somewhere around a hundred million on a fair market basis, and it’s probably worth about 150 at the high end of the investment value range —

today. Now Jeff, you’ve got three years to prep for this thing, and so we’re gonna go through the business very deeply. We’re gonna look at the resources, capabilities in the firm. We’re gonna look at the company’s strategy as people, the architecture, the routines, the culture of the business, and try to think about all the different areas.

We’re gonna look at basically capital allocation. How is Jeff allocating his capital, and is Jeff’s business allocating its capital to the highest and best uses? A lot of times business owners really get tunnel vision because they’ve been doing the same thing so long and it has worked, and they’re not really thinking about other ways that they could do things that would help them compound growth within the firm.

So this baseline preliminary evaluation gives Jeff an idea of what that range looks like — the hundred to one-fifty.

Now, inevitably, what’s interesting to me is Jeff will look at this valuation and he’ll say, “Man, it’s worth at least a hundred bucks, but it’s probably worth one-fifty today. If you take my house and my other assets and so on and so forth, which is about 10 million bucks, I’m worth $160 million,” which is absolutely not correct.

So Jeff’s wealth is not the 150 million. In fact, it’s not even the hundred million. So the wealth that Jeff owns is, of course, his personal assets, which I just said were 10 million bucks, and it’s the stream of cash flow that that business is generating. When I talked about valuation, right — a hundred to a hundred fifty million — I’m talking about prices, right?

I’m taking valuation and I’m turning it into a price, which is a hundred to one-fifty, and price is just an opinion, right? It’s an opinion as to what the market would value that stream of cash flow today. So let’s think about this for a second. Equity, or stock in a business — so Jeff owns equity in his business.

Equity is nothing more than a claim on future cash flow, and the value, or the price, of that equity is just an opinion in the market as to what that particular stream of cash flow is worth. So Jeff’s wealth, if we said 150 million is likely what his business would sell for today, it’s not his wealth.

That’s the price of his business. You know, markets change. There are market cycles, and they change constantly. And when you look at industries that go through consolidation, for example, you know, you might have the beginning of an industry consolidation where typical companies are selling for six to seven times EBITDA. During the heady, hardcore days of hot consolidation, that might ratchet up to 12, 13, 15, 16 times EBITDA.

And then, of course, very quickly fall back down. And so in the course of the consolidation bubble, the valuation multiples went up, so the price or the value of the business went up. But the real wealth, which is the cash flow of the business, did not change. That’s just actual wealth. It’s cash flow of the business.

It’s just how the market interpreted the value of that stream of cash flow. And I think that’s very, very important for business owners to understand — that their wealth is not really the wealth locked up in the business, so to speak. The wealth is a stream of cash flows that the business generates, and the price, again, is a market’s interpretation today, in real time —

as to what that stream of cash flow is worth on the open market, what it’s worth to a financial buyer, what it’s worth to a strategic buyer, what it’s worth to cousin Eddie. They’ll all have different values on the valuation spectrum. And if you, as a business owner, can start to think about things that way, it’s gonna really help you make a lot of decisions.

It’s gonna help you allocate capital more efficiently, and it’s gonna help you really understand when you should and should not sell your business.

You know, over the course of my career now, I’ve lived through a lot of booms and busts, right? I started my investment banking career during the dot-com boom and bust. And then, of course, after that we saw the run-up. And we found ourselves at the great financial crisis, which of course was a disaster. And deals stopped, and valuations cratered.

It was a mess. Central banks around the world began quantitative easing programs. Markets began to shoot back up, and we’ve lived in an era, you know, for 15 years of, for the most part, ever-increasing asset prices. But business owners need to think about things from cyclical perspectives. So let’s go back for a second.

Number one, think about the fact that their business doesn’t have one value. It’s not objective, it’s subjective. It’s a range of values. Number two, that the current value, or the price that the market puts on their business, is not their wealth. It’s just what the market interprets the value to be today, which changes over time.

Thirdly, I think you really need to pay attention to consolidation cycles. I talked about boom and bust cycles, but industries go through consolidations, right? Back in the early two-thousands, we saw the IT staffing consolidation and government contracting consolidation. We’ve seen pest control and lawn care consolidate.

We’ve seen HVAC consolidate. There are all these different industries that go through consolidation waves, like the bottled water industry, for example. You have these very moribund markets where companies sell for three, four, or five times EBITDA, and then there’s a consolidation play, largely driven by either publicly traded companies or, more so today, by private equity.

When private equity starts to get into industries, they pay to play. They get large platform companies, and then they go out and make a lot of add-on acquisitions, which of course buoys the market, and we see run-ups in valuation multiples. And then once that consolidation starts to slow down, because it inevitably does, then the market changes once again.

And valuations fall. And what’s always interesting to me is, in every single industry consolidation that takes place, business owners within that particular industry always believe the good times are here to stay, right? Even though valuation multiples may have been five times trailing EBITDA for 25 years, and then we get to a consolidation boom and they go up to 15 times, the business owner is operating within that consolidation —

boom — thinking that, okay, 15x is the new normal, this is what it will always be. So I can go out now and do acquisitions at 10 times, and still create value, because I’m a 15x business. So if I can buy these smaller ones for 10x, I’m creating value. And then what they come to realize is, as the consolidation boom slows down and valuation multiples once again begin to fall, now they’re an eight-x business or a seven-x business, or, you know, inevitably they might be back to reverting back to the mean of five-x.

One of the questions I always hate from our clients is, “Hey Paul, I’m getting close to doing something, but maybe I’ve got another six months or a year. Where do you think valuations will be then?” Well, I have no idea, because, you know, we’ve got a lot of things going on, right? You gotta think about the broader capital markets, publicly traded markets.

And then you also have to think about industry dynamics. Who’s getting in and out of the industry, and where are we from a consolidation perspective? And so if you own a private business — say you own a mid-market business in an industry that could potentially consolidate or is consolidating — I think it’s really important for you to pay attention to consolidation.

How many deals are actually going on in the industry that you operate in? If there are no deals going on and things are very, very slow, that’s a great time for you to go out and do M&A. That’s a great time for you to buy, when things are cheap. That’s a great time for you to retool your business. When —

acquisition activity increases and there’s more demand and less supply of acquisition targets, you’re naturally gonna see valuation multiples draw up, and that’s the time when you should wake up and start to think about — maybe this is the time for an exit. And of course, it’s impossible to call the top.

And I find, in my relatively brief experience of 20 years, these consolidation booms tend to last longer than any of us would expect. But inevitably, just like the dot-com bust, when HA-LO Industries and Starbelly did their $240 million reunion, a couple months later that stock cratered, like thousands of others. So paying attention to consolidation booms is important, and I will do a future masterclass on understanding how to better time the market and what to look at.

Today, I’m talking about valuation in general.

Now, let’s go back to Jeff for a second. As you recall, we spent some time with Jeff. We did a preliminary valuation. His range was a hundred to 150 million, right? Fair market value to the top end of the strategic value range, 100 to one-fifty. So Jeff takes a look at this. We spent a lot of time thinking about how we can create value in the business.

He goes back for a few years, does a few small acquisitions, decreases risk, increases cash flow, does all sorts of stuff to the business. Comes back, and man, he killed it. His range has now moved up. It’s one-fifty to 200, as opposed to one hundred to one-fifty. And he says, “You know what, Paul? It’s time to pull the trigger.”

Well, inevitably, what I would say to Jeff is, “That’s great. Here’s what I want you to do, Jeff. Take your mind off the business for a second and think about who the acquirers are for this business. Who would be the most likely buyers? Who has reached out to you over the years?” “Oh, Paul, there’s — I get 50, 60 emails a year, so on.”

“Okay. Let’s pull all this stuff together. We’ll compile it, and we’ll take a look. But I really want you to think about who the best acquirers are. You’ve been in this business for longer than I have. Who do you think would be the right buyers?” “Okay, fine.” So Jeff comes back with a list. He’s got a huge list, but he says, “Paul, I think these six companies are the most likely buyers for this business.

In fact, I think A and B here could create the most value by doing this deal.” So Jeff is thinking about synergies that could be created. How can an acquirer cut cost? How can they do revenue enhancements? How could they utilize him with this technology? All the different hows. How might this acquisition be defensive to them?

In a lot of ways, the Starbelly acquisition was defensive for HA-LO. They were concerned that this innovative, disruptive business was gonna eat up the market. So by buying them, it was a defensive move, which is always great if you’re a seller. If an acquirer’s on the run, it’s defensive. So he says, “Paul, acquirer A and B, they’re both publicly traded.

I think that they can create the most value by doing this deal. They can cut the most costs, they can utilize my technology. They can get some revenue enhancements by cross-selling to my customers and their customers, selling that and so forth.” Great. So then we start to talk about the sell-side process, and we say, “Okay, we’re gonna take these six buyers here.

We’ve got some here. You’ve got some other congenial ones. We’re gonna add ’em to the list. We’re gonna go out to 42 potential buyers with the sell-side materials.” And inevitably the Jeffs of the world will sit back and say, “Paul, sure, we can do all this work. We can go out to 40 different companies. But —

if I think these two acquirers could create the most value, and I think acquirer A really is the one — they’ve contacted us, they want it, I know they’d create a lot of value — why wouldn’t we just go to acquirer A and see if they’ll pay us 200 million bucks?” And while I think that makes a lot of logical sense —

there are a couple problems with it. Number one, we can never know the stories that the buyers are telling themselves, right? We know the stories we want them to tell, but we never really understand what’s going on behind the scenes. And I’m gonna give you an example of that. It’s a real-life example that I dealt with in 2019.

I had a client who said the exact same thing. “So Paul, let’s just go to publicly traded acquirer A.” There were two other publicly traded acquirers in the market. He said, “I don’t really care for these guys. And quite frankly, I don’t see them creating as much value.” And I said, “Well, that’s great, but we never know what’s going on behind the scenes, and I think we should run a full process,” which we inevitably did.

And it wasn’t acquirer A, and it wasn’t acquirer B. It was acquirer C that came out and put an astronomical number on the table. We closed the deal with that. And what we determined later, we realized that that company was having some financial issues and wanted to plug a hole in its P&L. So it wanted to go out and do a massive acquisition.

It was publicly traded. It was getting towards the end of the quarter. They wanted to get it done. There was intense pressure to get the deal done, but they had some things going on behind the scenes that we didn’t understand, didn’t know about, with regard to their upcoming-year financial results, which caused them to do something they otherwise wouldn’t have done.

Now, there’s no way we could have known that, but had we just gone to acquirer A and acquirer B in that particular case, we would’ve left tens of millions of dollars on the table. Right? So we never really know what goes on behind the scenes. We don’t know what’s particularly defensive for an acquisition.

We don’t know how long an executive intends to stay around. Maybe an executive’s thinking about retiring. The CEO’s like, “You know what? I’m retiring next year, and I wanna get a slam-dunk deal done. You know, I’ve been very successful at deals over the years. Like, I’m gonna do a big one now, or I’m gonna do a series of small ones that are gonna work out well for us.”

We never really understand true motivations behind the scenes, so we always want to get full price discovery and talk to all the likely suspects. We never, ever want to assume. Now, on the sell side, we can craft a narrative and we can hope they’ll buy it. Sophisticated buyers know what we have to say, and then discount it accordingly.

But we never will know the stories that they’re telling themselves. We never know the CEO who’s telling himself he has to do a deal, or the CFO who’s telling the CEO, “You know what? We better do this deal, because if we don’t get this, our numbers are not gonna look right and our stock’s gonna crater next year.”

The other issue with just going into the one buyer is that, if you’re not running a full competitive process, more times than not — not always, but more times than not — you know, you’re not putting an acquirer in a position to lose. Remember, the sell-side process is the battle between fair market value and strategic value.

The acquirer’s actually creating the value on a deal. Let’s take the example of a transaction I recently saw in Asia. In India and Southeast Asia, there’s a lot of call centers, right? That service Australia, the United States, South Africa, the UK. You got English-speaking folks in the Philippines, for example, that answer the phone.

“Hello? Thank you for calling Chase Bank.” These jobs are being replaced by computers. I just get on ChatGPT on your phone, right? You can conjure any sort of voice. You can have a chat with it. It actually sounds like you’re talking to a person. So companies that actually have that technology will not need all these people.

And so an acquirer that had a tremendous amount of AI technology with regard to voice recognition and contact center management looks at a call center that’s been doing the same thing since 1982 — 5,000 people in this big building answering the phone. You know, the acquirer doesn’t need all those people.

What it needs is the customers. So it can make the acquisition of this company, get rid of thousands of people answering the phone, and let a computer do it all night long for just the price of electricity. In that particular case, it’s the acquirer that owns the technology. They’re buying the target, they’re getting rid of the cost; the acquirer’s creating the value there.

So it’s the battle between fair market value and investment value. And so why would this acquirer pay a full investment value unless somebody else was there waiting in the wings to pick it up for a price similar to what they would ultimately have to pay for it? You know, you need that competitive pressure and a process.

And so that’s why I always talk about — you gotta get full price discovery, and you gotta do it through an iterative process. And I spent a lot of time talking about that today, but I did talk about it in the sell-side M&A masterclass, as well as the psychology behind an M&A transaction masterclass.

I can tell you from experience — although, anecdotally, more times than not, I am wrong about which acquirer will prevail in a process. And I do this, unfortunately, seven days a week, and my clients are usually wrong about it too. It is extremely difficult to realize who’s gonna not only create the most value from a transaction, but have the willingness and the capacity to pay that price for it.

And so that’s why I always lean on a full process whenever I possibly can, because, you know, again, I just can’t assume that I’m smart enough to determine who’s gonna be able to do that. And secondly, even if I know who has the capacity and willingness to pay and can create the most value, how the hell do I get them to pay that?

Because every penny that’s extracted out of this value creation zone — it’s a zero-sum game, right? Like, so you create this value in a deal that the buyer’s arguing the buyer’s creating, right? They’re the ones writing a check. They’re the ones that own the business post-closing. It’s the buyer that has to make all the changes.

To them, it’s value they create. We own that value. We should pay fair market value for it. That’s not the way the world works, unfortunately, for buyers. They have to share that with the seller. Your goal as a seller is to extract as much of that value creation zone as possible out of the deal. And how you do that is, find as many of the best possible acquirers as you possibly can, and run them through a competitive process to extract as much of the value creation zone out of the deal.

As possible.

I think one of the most important things for you, as a business owner, to take away from all this is, number one, valuation is subjective. It’s not objective. There’s no one going rate or one price for your business. Buyers are ultimately the ones that are gonna understand the value subjectively. There is very little that you, as a seller, could do to really influence that, right?

And you should drop your assumptions at the door. Whenever you get into a sell-side scenario, you should not assume who can create the most value from the deal, and you should certainly not assume who has the most willingness to pay for it. You should use the process to determine that for you, and I can guarantee you, if you guys do that —

most of you’ll be surprised. What I hear most often from our clients here at Potomac is the extreme value in working with us years in advance of a sale. Not only do we help establish a fair market value and a range of investment values for the client, but we provide them a roadmap of everything they could possibly do in order to increase value and decrease risk in anticipation of a future sale.

If you’ve got a sale on the horizon — whether it be six months from now or five years from now — we’d love to have a chat with you. Please use the contact form below in the description to reach out to us today, and feel free to share this masterclass series with somebody who you think might benefit from it.

Again, I’m Paul Giannamore. Thank you for joining me today, and I’ll see you on the next one.