"Is 'Fair Price' a Myth? Exploring the Complexities of Value and Cost"
How do you know when a deal is "fair?" We've been excited about a few potentially big deals at Graff-Pinkert this week, and needless to say the topic of "fair price" has come up again. The points made in this blog continue to resonate with me, so I am sharing it with our audience on LinkedIn. I'd love to know your thoughts.
As a machinery dealer, I hear the word “fair†thrown around a lot during negotiations with customers. I think most people don’t mean any harm when they say it. They say it because they’ve heard other people say it. They think it sounds genuine and persuasive. But it grates on me because what does it even mean when you say the word “fair?†In Webster’s dictionary, “fair†is defined as, “Marked by impartiality and honesty: free from self-interest.â€
Let’s be honest with ourselves, in our deal we’re both negotiating in our own self-interests, so don’t talk to me as though you’re an impartial judge. I still believe in being truthful with customers in negotiations, and I care for the welfare of others, I just don’t think it’s accurate to label business agreements as “fair.â€
I admit, it’s hard for me to not say “fair†sometimes when negotiating, so I have a few alternative phrases I plug in when I’m tempted to say the word. I say things such as, “That idea makes sense,†or “That sounds sensible,†or “That sounds good.†Everybody gets the meaning, but I don’t have to say the dreaded word.
Unfortunately, sometimes you just have to live with using the word “fair†when making deals. It’s always used by parties in Graff-Pinkert’s business brokering division. It seems like every selling company starts out valuing their business at 6-7 x EBITDA, while every prospective buyer says “fair market value†for a machining business is 3-5 x EBITDA.
I admit, there is a valid rationale for using the phrase “fair market value†in the case of buying and selling businesses. In such a huge transaction, it’s helpful to have a price range as a starting point for the negotiation.
But still, in the end when any deal is made, assuming everyone involved has been honest and clear (Yes, that’s a big assumption), the price agreed upon is not fair, and it’s not unfair. It’s just the price.
Question: When was the last time you paid a “fair price?â€
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5 个月A fair price means both parties maintain a sense of mutual benefit. And “sense†is key here, because this can vary significantly depending on the business context and deal structure. In other words, as a business, you can structure this “fair price†in many ways that benefit other parties in both monetary and non-monetary forms. E.g. a business acquisition can be structured with a “fair price†that includes various elements such as cash, stock, earn-out, sign-up bonus, retention payments, stay bonuses, milestone payments, and so on. It depends on what you, as a seller, “sense†is fair for your current situation, stage of life, stage of business and other factors, which could be a combination of these elements. In the case of services or software, this sense of a fair price can also vary depending on what is applicable for both parties at their current stage of business. For instance, if you see strategic value in offering a customer a lower price than usual to gain better retention in the future, this may feel like a fair price. You understand that your offer is worth more in the short term, but the long-term strategic value outweighs short-term gains, making the fair price most relevant to your current business strategy.
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5 个月I'm also not a fan of the word fair, to be fair ?? I'd argue anything I willingly buy, makes it a fair price. Really, how else can we define fair? Any business should have the numbers they need to be profitable in business, and charge accordingly. Depending on your over heads, would depend on your margins. Are there companies that don't do this? Sure. They don't usually last either, at least not in my anecdotal experience. I don't feel like most machine shops charge a fair price, when I was watching Shop Rescue, one thing David Capkovitz and Michael Watkins brought up was how low margins tend to be in machine shops, because they don't charge enough to cover their own costs. Or they're just run so inefficiently that their margins are trash Yet there are distributors out there, that run at 50% margins, selling to those same machine shops. It's honestly something I struggled with when pricing my own services, if I dont charge enough the company will fail and I'll go back to working for someone else.
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5 个月Thank you for sharing this, Noah. Since your brought up acquisitions/transactions, I'd comment that there are lots of strategies that are "fair" to both parties in structuring a deal. For example, in the Allocation there are many things that can have minimal impact on the buyer and huge impact of the seller, or vice-versa. These things can often create a very "fair" give and take that everyone can walk away feeling good about! As a follow-up, I'm curious about how you balance transparency and strategic interest during negotiations on capital equipment. What strategies do you find most effective for ensuring both sides feel satisfied with the outcome, beyond just the terms of the deal? Looking forward to hearing your thoughts!
I would love to know your thoughts? Scott Aaron, Const Ivanov, Brandon Voss, Justin Tauber