Source: Todd Ganos from Forbes
About 100 years ago, there was a disagreement between two well-known physicists, Albert Einstein and Niels Bohr. The issue involved a simple question: where is the atom? Seems easy enough . . . but it’s not.
Back in those days, examinations of light gave us two competing views of what it was. Some experiments pointed to light being particles — photons — and each particle could be said as being at a specific point in space. “There it is. Right there.” Other experiments pointed to light being like a radio wave and was more like a fuzzball. Multiple people in different locations can listen to the same radio station at the same time. So . . . “It’s sort of in this general area but I can’t tell you exactly where.”
(For those who were art history majors, think of the head of a dandelion before you’ve made your wish and blown all of the wisps into the air.)
Well, which is it? A point or a fuzzball?
As time went on, the point versus fuzzball question extended to other things. It extended to the location of an individual atom. Was it “exactly here” or was it “sort of in this general area but I can’t tell you exactly where”? A point or a fuzzball?
Einstein wanted certainty. He wanted “exactly here.” This “sort of here” stuff was unsettling to him. On the other hand, Bohr said that the atom was also like a radio wave (fuzzball) until you look at it. When you actually peek at the fuzzball at an instant of time, the fuzzball “collapses” to a point and you can say “it’s here.” However, a different person peeking at the exact same time will say that it’s at a different spot.
As time went on, experiments proved that Bohr was right: 1) it’s a fuzzball and not an exact point and 2) the act of looking effects where you see it as being.
Swell. What’s this have to do with your company? Everything.
You are like Einstein. (Tell your significant other that I said so.) When you think about the value of your company — like Einstein — this “sort of here” stuff makes you uneasy. In your mind, you have a very specific dollar number. It’s “right there.”
But, it is really the buyer (the observer) who sets the price. Each type of buyer sees different benefits. Each type of buyer sees different risks. Those combined command different expected rates of return for a given buyer and — therefore — different valuations. Each buyer asks, “What’s the company worth to ME?” and not, “What’s the company worth to YOU?” Beauty is in the eye of the beholder.
So, the value of your company is NOT a point estimate. The value of your company is a fuzzball. The same exact company will have different valuations at the same time . . . just like Bohr was saying about the position of an atom.
A strategic buyer of your company might value it at 6 to 7 times earnings. A financial buyer of your company might value it at 5 to 6 times earnings. A competitor might be willing to pay 4 to 5 times earnings. Your management team might offer 3 to 4 times. And, for a transition to the next generation inside the family, it might put the value at 2 to 3 times earnings. Same company, five different valuations.
You accepting that the value of your company is a fuzzball is Step 1.
Depending on your company’s readiness for sale, the pool of buyers might not include strategic buyers or include financial buyers. You’re not there. So, when you see that strategic buyers are paying a certain multiple of earnings for companies in your industry and of your size, this type of buyer might not even be in play for you. You need to reset your expectations.
What is your company’s readiness for sale? It’s probably not what you think.