Expert opinion

How a robust valuation can cut through emotion in deal making

Rob Starr, Head of M&A at Shaw & Co, discusses how getting the right value for a business can minimise emotions during deal making.

4 minutes
September 12, 2022
Words:
Rob Starr
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“Better pay a fair price for a good business, than a good price for a for a fair business”
Warren Buffet

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.

Rob Starr, Head of M&A at Shaw & Co

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.

We work with owner managers of UK SMEs that are looking to fully or partially exit the business they’ve grown. Our value lies in helping clients assess their readiness to exit, finding the right buyers willing to pay the right price and managing the sale process whilst minimising associated risks. For a confidential, independent, no obligation discussion on how to sell a business, click the 'Let's chat' button.
Words:
Rob Starr
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