What’s the Cost of Entropy
Emily, David and I recorded a podcast recently where we discussed current market conditions and what sellers might expect from buyers in 2023. During that discussion I said at least one thing that David thought was incredibly self-interested and another that Emily thought maybe I shouldn’t have.
I stand behind both statements, and I’ll explain why.
What David thought was self-interested was when I advised sellers, when it comes to deciding what offer to take, to not let the most money tail wag the good decision dog. It’s self-interested because as a buyer of businesses that is measured on returns, we ostensibly benefit by paying less. Moreover, our offers tend to value differentiators that are not money (which is a commodity), so if we can get sellers to value those differentiators like we do, we win.
That’s one way of looking at it, but it ignores the fact that those differentiators do have value and that costs can be measured in units other than dollars. Time is a cost. Anguish is a cost. Uncertainty is a cost. Volatility is a cost. So if you can get more money but it means you have to stay involved with the business longer, lay off tenured employees, agree to accept an earnout or other contingent payment, and work to pay down debt, maybe that offer isn’t worth as much as the headline value. To make a true apples to apples comparison, money shouldn’t be the only point of comparison. In fact, once you surpass a certain threshold, money’s incremental importance might drop to zero.
As for what Emily thought maybe I shouldn’t have said, it’s the idea that our biggest competitor is the status quo. After all, if nobody ever sells us anything, we lose. But one of the reasons why we have our business is a shared passion for helping small businesses stay independent and thrive – and more of them will do just that if they just stay in the family (acknowledging, you know, circumstances).
What’s more, the value proposition of not transacting is pretty attractive. There are no disruptions to operations, no conflicts of interest, and no taxes. Did I mention no taxes?
But we know well that life is messy and that this isn’t always an option. That’s entropy for you, and it has a cost too.
– By Tim Hanson
