Value is in the Eye of the Buyer…Remember, Narcissus & Icarus Both Died

NarcissimOk, men, zip up your pants and put away the rulers. Women, put away the mirrors…you are all pretty. I beg of you to leave your egos & politics at the door. When we talk about value, it is hard to leave those things behind. Self-absorption and hubris will insidiously nag and bully you to burn the value you’ve worked so hard to build to the ground, and you won’t even know it until the dust clears.

What is something worth? Getting this answer right is the essence of making money and generating long-term value. You could be buying a company, a home, or maybe even just a sandwich for lunch and at some point, before you open your wallet (and even after,) you will assess whether the ’quo’ is worth your ‘quid.’

So how do you determine worth? It is simple, YOU don’t…the buyer does! Something is worth exactly what someone else is willing to pay for it. Let’s be clear, value is what something is worth, and valuation is just the tool used to justify that value.

There are a lot of formulas and methodologies for valuation that they teach us in business school to assess and assign a number to express ‘worth.’ Regardless of what formulas you use to validate price, every method has variables. Those variables are inevitably tweaked, negotiated, and bent all in the effort to back into a number that endorses what someone believes the asset is worth. And yet, almost any rationale to express value seems to illicit conflict. In comes ego chock full of self-absorption and hubris to our defense and demise.

The only time a valuation actually matters is in the context of an impending transaction: when someone is buying, selling, or financing. So when we think about valuation, we often get myopic about the static number as it relates to that one transaction. However, it is important that the transaction itself doesn’t diminish the value you’ve built, and the subsequent value that should be built and grown afterwards. So for whatever type transaction you need to have your value assessed, it is important to leave your ego at the door because it isn’t about what you believe something to be worth, it is about what the person laying out the dough deems.

I have often been asked to offer a valuation assessment for many different types of transactions from large multi-billion dollar acquisitions to early stage companies with no revenues and everything in between. At a basic level, what is valued is equity. Some buyers are willing to pay something commensurate to the future value that it will bring to their venture. Some more short sighted and fearful acquirers will see the value in ensuring that their competitor doesn’t get it or to quash an innovation that could threaten a core product facing obsolescence. And there are an even larger group of private equity investors that look to buy and flip for a profit. Some investors want to genuinely acquire and grow to build long-term value in the venture. Or perhaps you are looking to take on some debt to grow the company. In all of these instances, value is going to be seen from the eyes of the buyer.

Now, I can put together a meaningful analysis of equity valuation as a disinterested third party. However, I have yet to find a way to offer any appropriate compensation for “blood, sweat and tears,” “self-righteousness,” or “hurt feelings.” This is where hubris and self-absorption ingratiate their way into the discussion of value and almost always muck up any hope of closing a transaction that will maintain and build value. In fact, all too often these uninvited guests to the negotiating table end up destroying the very value you’ve worked so hard to build and seriously thwart any long-term value generation.

A good capitalist will know that if you’ve built something of value that it is in everyone’s best interest to maintain that value and ensure it can continue to grow for the long-term even if you are no longer a part of the company. A good capitalist will know to prioritize the long-term needs of the venture over their individual wants. Something is worth exactly what someone else is willing to pay for it.

So when it comes to value, be smart enough to leave your precious ego at the door. If an offer to buy your ‘home’ doesn’t reflect the mirage your ego has convinced you of, then I beg of you: Don’t burn down the house because you’ve let your self-righteousness bully you into being resolute. All you’ve done is piss kerosene on a fire, and all you will be left with is a useless pile of ashes and your irrelevant resolve to keep you warm. Meanwhile, there may have been people who needed to live in that house and you’ve rendered them and yourself homeless and possibly perished. Remember, Narcissus and Icarus both died. Et tu Capitol Hill?

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