May 24, 201810:39 AMExit Stage Right
with Martha Sullivan
‘Fired for no reason!’
(page 1 of 2)
I recently got a call from my friend, Casey. “I got just got fired for no reason!”
She had just started in a new job at “Acme Inc.” She was so excited about the job and building new relationships. The most troubling part of the experience for Casey, aside from the obvious, was she was left with no understanding of why it didn’t work out. She believed she was doing a good job learning the ropes. The only explanation given was “it’s not a good fit.” In Casey-speak, that’s “no reason” and certainly not of her own doing.
This same week, I was talking with another friend, Sam, who is actively negotiating to sell his company. He was sharing his frustration about the buyer, James. James had approached Sam directly. Sam, having sold a company before, was confident that he could handle the deal without any help from a business transition or M&A advisor.
In fact, Sam and James appeared to be on the same page. The two talked numbers. James offered $4.6 million, which he believed came close to what Sam said he wanted ($5 million). James shared his analysis and rationale with Sam. It was, in fact, a sound analysis based on the historical and trailing 12 months of performance.
Sam took one look at the number and pushed back — hard. James’ offer bundled the real estate value ($1.4 million) into the total to arrive at a number that would be pretty close to what Sam said he wants. However, unbeknownst to James, Sam wasn’t including the real estate. He wants $5 million for the business operations only.
Sam’s number is based on two things we commonly see sellers use as their rationale for their target price. First, it’s what he wants. He has no idea how the market would value the business. It’s just the number he feels he should get. Second, he sees opportunities for his current and future product lines and wants to be paid for the future cash flow, not the historical. James’ analysis, which appears to be consistent with how companies are priced in the market, isn’t swaying Sam. To Sam’s thinking, James is low-balling him for “no reason.”
The parallels between Casey and Sam’s situations boil down to this: What is a reasonable expectation of risk and reward given what is known at the time? For Casey, was she being realistic about her actual performance? Was Acme realistic with its expectations about how fast an employee can ramp up in three days? Did Acme communicate their expectations?