The Concept of Value and Other Whimsical Things – Part 2
Continuing our voyage to the meaning of value, let us think about some of the non-financial aspects of what a distributorship is “worth”. Although it is fundamentally financial in nature, people’s desires or expectations for a return on investment are different. Perhaps you want a 15 year pay-back, and I’m happy with 25 years. Is there a strategic implication for the deal? Does it ensure my organization’s long-term viability? Are there operating synergies? What is it worth to continue the family business your grandfather started? What is it worth to have your sons and daughters continue in the business? What is it worth to be the beer-guy in town with all the perks that come with it? What is it worth to have a nice cash-flow friendly business? What value – both economic and non-economic - does my family (and extended family and friends) take from the business and is it remotely possible to replace this value?
I’ve been told more than once, “John, I’ve got more wealth than I could ever spend. My family is set for generations regardless of what happens to this distributorship. I’m not leaving no matter what. If it goes down in flames I’m still OK.” Kind of hard to argue with that! ;-) I’ve encountered this thinking when purchasing too… “yeah I know I’m over-paying but I’ve got my reasons (son or daughter or long-term viability or whatever) and my family and I are protected even if it goes south.” I like those folks when I’m on the selling side! ;-) The price doesn’t matter to them as much as getting the deal done… the infamous; no one will remember what we paid 30 years from now. And there is some truth to that statement… unless of course the debt payments bring the entire thing crashing down. In that case no one will remember what you paid since you will be long gone and someone else will own the dang thing.
I was recently on a project (attempting to complete a complicated merger) and the owner was somewhat disparaging one of the other parties, as in it’s all about the money to him… nothing else. My response to this was “great! I can deal with money-driven issues… those are relatively easy. It’s the emotional side which causes the problems. The emotional side is where logic is thrown out the window… and that makes the situation much more difficult to navigate to a successful win-win conclusion.” And the emotional side can and does have a tremendous impact on this thing we call value. This is true from both a buyer and seller’s perspective.
“Value” is also impacted by the nature of the marketplace. Valuing a pure financial object, say a share of Cisco common stock, is relatively easy since the market does it for you. Millions of shares of stock trading daily in millions of transactions will quickly determine the value. The marketplace will speak and set the value… regardless of any individual’s wants or desires.
When you have an asset which is traded much less frequently, arriving at a value is much more difficult. Some of you may have experienced this in trying to get rid of an old warehouse… it’s difficult to arrive at an appraised value when nothing similar has been sold in the area in the last 10 years. Obviously beer distributorships fall into this second category. Even though the pace of deals has increased to a record level… record pace is still very few for decisively determining “value”. Throw in differences in state laws (and market share/relative strength, demographics, population trends, etc.) and the very few get even smaller.
Uniqueness of an asset also makes valuing much more difficult. A handful of territories around the country are true gems… there are few other places which present the demographic mix, population growth, etc. that these gems do. How does this impact value? I’ve known people whose primary (in some cases sole) consideration when looking to purchase a distributorship is do they want to live there. Once again, ‘I’ve got more money than I can ever spend and my quality of life is the most important factor”. I can’t argue with it.
And of course the ultimate determinate of value is what someone is willing to pay for it. That’s where the rubber meets the road. You might think your house is worth $1M, but if no one will pay more than $500K for it, then that is its value in the market today… regardless of yours or my wishes. And one of the primary factors of this (in many cases the only factor) is how many potential purchasers are in the market. Is there only one person in the entire world which makes sense to purchase this asset? If so, the price might be less than desired… of course then again, how bad does this party want the asset? How important is it to them? It could lead to a stupendous “value”… especially if the potential seller does not have to sell the asset. Let me emphasize again, just because there is only one buyer does not automatically mean the value will be low… it might be or it might not be. Or there may be many people interested… and perhaps the direction the deal goes sets the chess board for years to come… if not forever. In that case you are almost assuredly looking at a high value.
I’ve been involved in 2 recent Miller deals. In one the price was just over one times 12 months gross profit (happily I was on the buying side of this one) and in the other the price was just under five times gross profit (and happily again, I was on the selling side of that one). Since I hate politicians who claim credit when things go well (generally through no action of theirs) and then blame others when things go bad (generally because of their actions), I won’t claim any great credit in either of these deals. In each situation the amount paid was right for those specific circumstances… for both parties. As I joke with my clients, I won’t take any credit… all I ask them to do is to look at their financials or business situation and compare pre-Conlin with post-Conlin… there is always an amazing correlation to good things ;-) And with that bit of self-promotion, I’ll end this post until the next… a continued discussion of value.