DON’T AUCTION YOUR START-UP. DON’T BARROW YOUR BUSINESS.
A picture speaks a thousand words, the adage goes. No one disputes this, however, what no person has been able to reveal is the status of the words spoken by the picture. Are they true or lies? The picture below speaks of a very calm meeting just about to take place. Probably a training or one of those high-level meetings where everyone walks home with a fat sitting allowance. FALSE! This meeting was hot! It was full of fire and all forms of combustible gas were present. The water you see on the table couldn’t sooth the heat. It is not enough to have affable business partners but it is more important that everyone gets value for what they pay for or invent.
This was a company buy-in transaction about to happen. Someone, an individual, was buying a stake into one of our client’s firm. Negotiations had been going on (unofficially) and the buyer was supposed to come with a number. When the number was tabled, a curse word from our client erupted. Crikey expressions from everyone except me. I was happy. See, I had warned them that undertaking such a transaction without valuing the firm was suicidal. Ready for slaughter! There was no way that the value of the firm can be a number on the table. Sounds like an auction. Even if the number is good, what percentage would be equivalent to that number? These are the questions that our client refused to answer. Why? He didn’t want to start off a relationship in ‘bad blood’. Bad blood he got! Rain on his parade but a blessing in disguise.
The truth is, the modern world of finance is so advanced that the company stake should not be auctioned. The value of the firm will help the owners in more ways than just the sale of the company’s stake. Valuation will be important during mergers and acquisitions, strategic planning, shareholder exit and entry, senior manager’s evaluation, etc.
Back to our conference room. I was in a bevy of chaotic numbers. The two teams kept going back and forth, higher number, but the percentage of ownership wasn’t changing. I had to ask my client for a tete a tete. I was brief and sharp because there was no better opportunity than this. I simply asked him: call off this meeting, ask for time to value the company and the buyer’s team will come with their own advisors and the negotiation will be objective around the valuation report. The client obliged. Truce.
Auctioning companies in 2019 is like boiling herbs for medication. Do not value your companies only for sale of stake but also use it to keep track of value added by the management in every stage. Many advanced firms have incorporated this method as a way of rewarding their managers. A valuation during entry of the manager and the comparison at different stages. It keeps your senior managers in check. Measurable achievements. Growth can be attributed to policies and execution strategies of the manager. The cost may make some owners hem and haw about the process but, again, it is worth every penny. It gives you a whole 9 yard in any strategic decision.
If you own a business or have a senior management position in a non-quoted firm, keep this in mind: Get a finance consultant and keep the value of your business updated.
I will address the business valuation issue in detail especially for SMEs in a future article. Thank you for your contributions, i keep learning.