June 17, 2010

The dilemma

At the beginning of my seminars I ask the participants: “Is it necessary to determine a sales price for your company shares when you decide to sell all or some of them?” The answer is always the same: “Yes”. Naturally, we ask the price when we buy something. If the seller doesn’t tell us the price, how can we buy it? Our experiences in life confirm this point.

I continue with my questions in my seminars:
“ Please assume that you have a potential acquirer and you have determined together with your financial advisor a price of 8 as the value of your total company shares. You have also thought about your answer when the potential acquirer asks you about the value of your company shares. You have decided to quote a price somewhat more than 8. Let’s say 10. Most probably you will be reluctant to increase your quoted price more than this by considering the value you have determined in the first place. You will be thinking that if you give too high a price, then the potential acquirer won’t find you serious and will end the talks. Is this true?”
From the nodding of heads and the facial expressions of the participants, I know that they follow me easily and find my reasoning logical.

I continue with my questions: “Now, please put yourself in place of the potential acquirer. How would you react to a price declaration of 10?” Generally, the answers I receive range from 2 to 5 depending on the conscience of the answering person. On a personal level all of these answers are correct; just like the initial price declaration. However, there is something wrong with the result we have obtained. The potential acquirers quote a price between 2 and 5 to the value we had calculated as 8. Knowing about this discrepancy, a lot of businessmen still put themselves in such a situation. The businessmen don’t act by putting together their experiences in selling and buying.

The solution to this dilemma lies in withholding a price declaration. The potential acquirers would accept the fact that you don’t quote a price if you act as if your company shares were put to auction. To have an auction, it is necessary to actively market the company to be auctioned. The auction ensures that you receive a high final price. Generally, we observe that this final price is considerably higher than the price that had been calculated by the shareholders and their financial advisors.

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