(Your Cash; My Valuation) and the fallacy of Intent to Invest

Many many years ago as a young apprentice I was inducted into the then world of valuations from where I entered the deals space — Investments and Acquisitions. At that time during negotiations I heard a phrase from an Owner — “your cash” and “my valuation”. In my head the business rationale (or the lack of it to make up the Valley) didnt make sense, and I gently suggested — well both stay in respective places (my cash in my pocket and your valuation in your head) then and its good for us both, probably. We both Smiled.

This month I came across 2 situations that reminded me of this — one for a young company raising USD3mn and other profitable bootstrapped founder >USD10mn in revenues entering the exit mode. And the common yardstick was expectations of what one should be valued at. Nothing wrong here, that’s commonplace. What I found is how an “intent to invest/acquire” at a point in the past creates an anchoring bias for what then is the value of the company, even if the a) investment/acquisition never happened b) fair amount of time has passed since that “event” c) business metrics since then, now and going forward dont sync

Now it started become more, shall we say, “interesting”, when the founder for the company wanting to exit showed me a sheet — which nicely (read coloured PPT) came up with a comparable valuations multiple sheet. Welcome sight to be objectively focused on understanding , but if the deals never closed then can that be a benchmark? It can certainly be an ask/expectation but to then show an extract of a database to say all in industry go by that, its starting to then get on slippery wicket. I probably think most established databases use completed transaction multiples and never announced ones and certainly never “intent to invest” ones.

All this when the discussions could also have been on business, growth, changing market landscape and how the company is getting or already equipped to not only navigate but scale further, how they want to then also get in a new team leader etc. All pointing to saying even if you enter in at this valuation there is an opportunity for more which were on the right direction.

Negotiate. By all means do that. “But they valued me at this so they must have seen something in us” cannot be the only thing to respond. Yes the value to different acquirers looking at the same target company can be different. Oh, by the way that was few years ago pre-Covid but we should be back now to post covid so that valuation still stands. Value to the same acquirer looking at the same target again at different point in time also can be different. My eyes now wandered at the “EXIT” door of the office, probably from where I imagine a few others could have also bolted in the past.

The founder and me walked towards the exit of the assembly/manufacturing plant. We shook hands and the founder leaned and asked — will you allow me to call what I had been offered then as “MTM” ? We both Smiled.