Are You Focusing on Price or Value?

Warren Buffet once famously said, “Price is what you pay - but value is what you get.” It is a truism that has guided him to incredible success and something that, when misapplied, has kept many a business owner from achieving greatness. When a really important decision is at hand, it has been my experience that 90+% of business owners focus on the wrong thing – namely, they focus on price at times when value is what is important.

My colleagues and I enjoy a thriving sell-side M&A representation practice. The inspiration for this blog was a conversation I have had too many times with too many business owners when they are researching transaction advisory firms to represent them in the sale of their businesses.

Let us define the two terms: Price is arbitrary (what a willing buyer and a willing seller agree to exchange). Value is fundamental (meaning it is not correlated to price - it is either conveyed or it is not). And as is true most often in life, the M&A advisory space is one where you get what you pay for. Therefore, this blog will be a plea for anyone considering the sale of their business (most likely the largest asset they own). It is a transaction that normally happens in the later years of life and one that you only get one shot at getting right. Why on earth would you focus on the price of representation?  Why would not the top of your checklist look like this:

• ‍‍Valuation – What is the fair market value of my business? And how do I most accurately determine that value in a way that is defendable to a buyer trying to negotiate a great deal for themselves. Are there simple items I can work on to increase that value?
  

• Alignment – Once I know the fair market value of my business, can I find a transaction specialist whose values align with my values? One who has been successful selling businesses like mine for above market gains? One who is transparent and honest and who has accounting, tax, and legal staff to attend to my project? One who I trust to negotiate in my best interests?
  

• When I find a firm meeting my personal criteria and high standards – Will they be open to a win-win engagement where our financial interests are aligned? Is there a way to protect me from the engagement being a windfall for them if my objectives are never reached?
  

• Understanding most firms meeting these criteria will be boutique – Can I get assurance that I will get the full attention of their “A” team, and does that team have the capacity to make my engagement a top priority? What outside professionals will be necessary and required over the course of the transaction, and will they “play well in the sandbox" with my advisor? Or even better, do they have all the professional disciplines in-house under one roof?

Price is affected by a slew of factors - some in your control, some not so much. Value has a direct correlation with how well you align yourself with those engaged to help you achieve your vision. Many things affect price and your pre-experience perception of a good deal, but value is so rooted in intangibles that rarely do the factors influencing price significantly affect the value received. Therefore you “feel” value (or the absence of it) in your gut, and price is only played out in your head.

‍Failing to recognize the difference between price and value has caused many business owners to leave millions of dollars on the table when selling their companies and has landed others in court due to having engaged a weak representation team. If you knew in advance that the buyer of your business was going to employ very expensive accounting, legal, valuation, appraisal, and other disciplines, why would you intentionally choose to enter those negotiations with anything other than the best on your side of the table to counter the buyer’s advantages? (This scenario is especially true if your buyer is a private equity firm, family office, hedge, or pension fund, or publicly traded company.) Professional buyers and their professional posse often chisel away at the value a naive business owner will receive if working with a weak broker or generalist attorney. You do not want to be one of those statistics!

‍I am writing about this topic now because after a Covid-induced wild year, many of you are going to go through annual year-end reflections and new year goal setting. You may be tempted to think, “I’m too tired to ride the roller-coaster business cycle (typically 6-years minimum) down and back up again.” You will wonder – “Could I get enough for my business now to retire in 2021?” You might also think it wise to sell and get out before any new tax hikes, regulation, credit risk, oil slumps, or other instability further affect the value and transferability of your business. 

If you are thinking that way, you will be pleased to hear that for many trades and industries, valuations are still quite healthy, buyers abound, and credit is plentiful for business acquisitions. We, like many, are leery of how the sellers' side of the M&A market will hold up after the potential onslaught of depressed businesses and IRS changes come at us. But for now, we believe that “can has been kicked 6 months further down the road," and we remain optimistic for sellers in the first half of 2021.

If you are thinking about selling your business in 2021 and especially if you are being smart and looking for quality representation to help you exit well, I encourage you to focus on aligning your goals with a firm capable of delivering the value you need from the event. Once you find value alignment, price can be worked out.

And for those of you who are not thinking of selling in 2021, think back to 2015 and ask yourself how well your 5-year plan panned out. Chances are, if it were a 3-year plan or a 4-year plan, things would have worked out great. But by holding on a little too long, you have entered another period of doubt and uncertainty causing that next 3-5-year plan to be susceptible to a precarious business climate. We are here for you, too, if you need help positioning for a 3-5-year successful exit.

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About GaP Business Advisors

Gilbert & Pardue Business Advisors (GaP) is a Houston-based business advisory firm serving lower middle market and middle market business owners from coast to coast through representation for Mergers & Acquisitions (M&A) and through business value-growth services such as Fractional CFO, Advisory Board, Executive Coaching, and Consulting.

Matt Gilbert and Bret Pardue established GaP to provide owners of businesses generally enjoying annual revenue of $5-$75 million with the quality of M&A representation and value-enhancement services previously only available to upper middle and large businesses. GaP brings highly-experienced executives, sophisticated financial and marketing products, proven-effective processes, and fully-integrated expertise to every engagement. No other M&A firm serving the lower middle and middle market provides the quality of representation and transactional expertise that we do.