Perceived Value...

"Try not to become a man of success, but rather try to become a man of value."
~Albert Einstein

This morning I was invited to attend a seminar about maximizing the value of a company prior to selling it. Now I’m really not interested in selling OptiFuse, but I thought it might be a good use of my time to investigate how others might value the company or more likely how I might value a company that I am looking to acquire.

The speaker began his talk by asking the audience a simple question.

"What is the best method to place a valuation on a company"?

Several seemingly intelligent people shouted out logical answers to his question...

...EBITDA times four... one times revenue... current free cash flow plus equity...

All of these might be considered rational answers... but then he gave us the one true correct answer...

"A company is worth exactly what someone is willing to pay for it... sure there are many different ways to try and justify an "asking price" to a potential buyer... but in the end it’s only worth what someone is willing to write a check for".

I’ve really never given his answer much thought before this morning... but he was right on the mark with his answer.

I must confess that after listening to the speaker’s opening question and answer, I really wasn’t focused too much on the rest of his lecture about maximizing profits by cutting expenses and unprofitable customers while creating sustainable processes and systems that will continue long after the founders have exited the company...

I suspect that all those things he was talking about were important... if one is selling their company... but I’m not a seller so his material fell somewhat upon deaf ears.

What kept ruminating with me during the rest of the morning was the idea about value being created based on how others value the commodity that you’re selling.

This idea can be extended to selling and buying all products and services throughout the world. Products and/or services are only valuable if you find someone who agrees to purchase them at the price that you have set.

Sometimes products cost more because there is a perception the products are much better than they really are. They also might offer features that are included but, in practical terms, are essentially useless.

This phenomenon often happens in automobiles where the main basic purpose of a car is to safely transport a person from one place to another. Yet with this understanding, there are cars available in the market that could cost more than a modest home, but also have a top speed in excess of 240 miles per hour... even though the top speed limit found anywhere in the United States is only 85 miles per hour (albeit there is currently only 41 miles of just one highway in Texas with this speed limit).

They continue to make these cars because there are willing buyers for them.

Clothing is another great example of style over functionality. There is no logical reason to purchase a pair of $300 denim jeans but people do every day. There are willing buyers... so there are willing sellers...

The same fashion reasoning can be found in watches, handbags, shoes, and other apparel items. People who purchase these items are not looking for a bargain and are willing to pay a great premium to be the owner of such goods. There is inherently some perceived value that far exceeds the functional value of the product.

The ultimate in perceived value might be artwork or other types of collectibles where there is no real functionality at all. People value these items merely on the uniqueness or rarity of the item. There are tens of thousands of artists but only one Van Gogh or Jackson Pollack and each one of their works is unique and different.

Perception and personal biases play a big role as to why people value luxury goods or art but these same perceptions and biases play a large role when companies make hiring decisions as well.

A good friend of mine is an HR director for a large company who has hired thousands of people over the past 25 years. At first she was overly impressed by job candidates with diplomas from top universities. She ended up hiring many of these candidates at premium salaries because she thought she was getting a higher quality person but in the end, she found that these employees offer no better work overall than those from lesser known colleges. She paid more for the perception of the degree... not necessarily the reality of the person doing the work.

The idea that I’d like to leave you with today is that we all have certain qualities and traits that can be considered unique and different. Not everyone will value these characteristics the same as there is a great degree of subjectivity and bias involved. However there will be forever, a select group of individuals who value what it is that you have to offer even though it is not always readily apparent.

This principle applies whether you’re trying to find a mate, a job, or like-minded friends. The key point is to continue to be your true self and you will eventually find people that value you.

There will always be a willing "buyer" for the individual uniqueness that you offer... never lower your "asking price"... but rather maximize the value that you offer.

Thank you for your support of OptiFuse where we continue to bring our customers valuable products and outstanding customer service.