Guest Post: Friday Forward – Outsized Expectations (#419) by Robert Glazer, Founder of Acceleration Partners
The following is a guest post by author and entrepreneur Robert Glazer of Acceleration Partners. Mr. Glazer distributes a thoughtful “Friday Forward” reflection on various topics each Friday morning. His post below caught our attention as it speaks clearly and directly about the importance of having clear and reasonable expectations about business valuation before taking the step to sell your business.
Over the past few years, our company has been in the market for acquisitions as part of our growth strategy. Searching for acquisitions is a bit like dating, with a similar percentage of success; you might have 50 to 100 initial conversations and explore things with a handful of prospects in depth just to get to one perfect match.
One of the first things I seek out in these initial conversations is the seller’s pricing or valuation expectations. Acquisition prices, as with housing prices, tend to follow basic formulas and norms based on the industry, size of company, profitability, and other factors.
If you’ve ever bought a home—or watched enough HGTV—you know real estate agents often price a home based on the cost of similar homes in the same area. While sellers sometimes get lucky, you can’t expect $900K for a house in a market where similar homes of the same condition tend to go for $700K. Your realtor would tell you upfront you were being unrealistic.
In most cases of mergers and acquisitions (M&A), there is a similar pricing approach. Whatever the industry or company type, you can probably estimate a valuation range by looking at comparable deals in the same industry and similar size of business that have cleared the market, or actually sold.
Not surprisingly, many sellers have an inflated valuation of their own businesses based on exceptionally high transaction prices they’ve heard about in the rumor mill, or poor comparisons. For example, a seller in a services business that the market would value around $10 million might be expecting $50 million, because that’s what a tech business founder in one of their networking groups claims to have been offered for their company.
Over years of M&A discussions, I’ve noticed sellers with these types of unrealistic expectations usually find themselves without a transaction after investing years of time and energy in the M&A process. Surprisingly often, they are convinced their businesses deserve to have an outlier valuation and be the exception, rather than the norm.
It’s true that in any market there are extreme cases, and people who wildly overpay for homes, art, companies or anything else they don’t want to lose out on. But these extreme outcomes shouldn’t dictate your expectations—exceptions are, by definition, outliers that are rare in nature.
The fact is that in many cases, largely due to our egos or outsized ambitions, we believe we will be the exception, rather than the rule. However, what more often leads to success is working hard to put ourselves in a position to be an exception, while still anchoring expectations to the norm. Or, to copy a classic phrase—expect the norm, hope for the exception.
Amazon and Jeff Bezos are an exception. Michael Jordan is an exception. Oprah Winfrey is an exception. They have a miraculous blend of talent and drive, plus good luck and timing. They aren’t the rule, the norm or the expected outcome; they are decidedly outliers. While you can aspire to work as hard as Bezos, Jordan or Winfrey, going into business, sports or entertainment expecting to have the same outcome as them is a low-probability gamble.
Expecting that you will be the exception will also set you up for a lot of disappointment. When you decide being an exception is the only outcome you will settle for, you’ll likely waste a lot of time and energy just to end up disappointed or viewed as out of touch with reality.
While people tend to let their emotions get the best of them, markets very often tend to be rational, especially over the long run.
If you have an outcome you are seeking, especially with something you are hoping to sell, don’t expect to be the outlier. Instead, talk to a number of people who have done the same and try to get a sense of the most likely outcome.
While it’s good to aspire, it’s important to understand the market and the odds.
About Friday Forward
Friday Forward has grown into a Friday morning ritual for nearly 200,000 people across 150 countries who are passionate about leadership and self-improvement. Friday Forward delivers a short inspirational or thought-provoking story to your inbox every Friday. The topics vary, but they’re organized around universal themes: leadership, self-improvement, pushing your limits, building better personal and professional relationships, and reaching your full potential.
About Robert Glazer
Robert Glazer is the Founder and Chairman of the Board of global partner marketing agency, Acceleration Partners. A serial entrepreneur, award-winning executive, bestselling author, and keynote speaker, Bob has a passion for helping individuals and organizations build their capacity and elevate their performance.
About Calder Capital
Founded in 2013, Calder Capital, LLC is a lower middle market investment bank providing mergers and acquisitions advisory services to business owners, entrepreneurs, family offices, and investors across the United States. Our dedicated team of professionals combines extensive industry experience, technological innovation, negotiation savvy, and key relationships to exhibit exceptional execution. Calder’s services include mergers and acquisitions advisory, private funds and capital markets advisory, and business valuations.