The Eye Of The Beholder: 4 Perspectives
When Margaret Wolfe Hungerford wrote in 1878’s Molly Bawn that “beauty is in the eye of the beholder,” she created an idiom that has been applied to diverse environments over a century later. Selling or buying a business is no exception – value is in the eye of the beholder.
Each buyer and seller is unique, in addition to the obvious difference in perspective between buyers and sellers. What this means is that there will always be differences in opinion about the value of a company. A buyer and seller will seek the best price based on perceived past performance and potential, but the “best price” is usually higher for the seller than the buyer.
There are many ways to estimate the value of a business. Financial calculations are one of the most frequently used methods for valuation purposes (e.g. a multiple of EBITDA), but the calculations are based on assumptions about which buyer and seller may not agree. Buyer and seller will both consider past performance and future opportunity, but they may interpret similar financial results in different ways and reach dissimilar conclusions for their value. A seller may place high value on proprietary software that has little value for a buyer who wants to integrate the operation of the acquired company into the buyer’s system.
What’s the answer?
The best answer is likely among the following:
- Accept the fact that valuation and a reasonable price are always subject to an individual perspective.
- Sellers and buyers can have different perspectives and still have a very win-win resolution by crafting an agreement that recognizes individual viewpoints.
- The more robust the perspective (e.g. long-term vs. short-term) the more likely that diverging viewpoints can be accommodated.
- Lastly, it’s not personal. Because a seller may have significant emotional attachment to his or her “baby” and the buyer does not, emotional connection to the business sometimes has an impact on the negotiations – something for all parties to consider.
Buyers and sellers often engage in negotiations that struggle because they are too focused on their own perspective. Considering the financial goals and objectives of the other party in the transaction will help you attain yours.