Expert opinion
Rob Starr, Head of M&A at Shaw & Co, discusses how getting the right value for a business can minimise emotions during deal making.
“Better pay a fair price for a good business, than a good price for a for a fair business”
Deal making can get pretty emotional. Afterall, there is a lot at stake and buying or selling a business is not something the majority of business owners (or would-be owners) do on a regular basis. There is a lot of judgement involved, no two businesses are the same, and views on value and terms can differ wildly.
Emotions can be escalated yet further when the parties each have a vested interest in the business in question. For example, when undertaking a management buy-out or a share buyback. Unlike many transactions, if buyer and seller don’t see eye-to-eye, there is limited if any opportunity to simply walk away. Worse still, one party might feel that they have a tactical advantage and seek to drive it home, rather than focus on fair and reasonable valuation or terms.
Commonly arguments arise over who has built the value in a company, especially when a management team is looking to purchase a business, or part of it, as they often feel that they are paying for value they have created. This of course conveniently ignores the fact that they have been paid a fair, risk free, salary for doing so, whilst the shareholder has carried the business risk. These issues get further escalated as all too often a buy-out or share buy-back is addressed far too late – by which time the parties have already started to harbour resentment towards one another.
When advising buyer or sellers in these circumstances I always refer to a phrase coined by Warren Buffett “Better pay a fair price for a good business, than a good price for a for a fair business,” so that conversations lead back to what is deemed ‘fair’. Also, one has to remind all involved the difference between an employee and a shareholder. All too often in SME transactions that distinction gets blurred.
Working through these emotional situations can be helped enormously by a robust, independent, and unbiased valuation. Whilst parties may dispute certain judgements, elements, or facts within the valuation, these views can be accommodated to build up a picture of what ‘fair’ means. Focus on value, and not cost. Focus on the facts in front of you, rather than the circumstances that led to them. A shareholder owns the shares, and they have a fair value if they are to be purchased. That simple approach has unlocked numerous transactions and, no doubt, will unlock many more.
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