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Read This If You Feel Your Startup's Valuation Isn't Fair


Everyone who is involved in the world of building, investing, and serving companies believes in capitalism.


At its core, capitalism is about win-win transactions. So, for buyers, it's all about paying a fair price for what they're getting. Fairness is the significant point here.

There’s no concept more subjective than fairness.

What's fair to one person might not be fair to another, leading to a plethora of (mis)interpretations and (mis)understandings.


In M&A, a fair valuation refers to the intrinsic value of a business and is generally determined through income-based (DCF) or market-based (Valuation Multiple) methods. Buyers often rely on intrinsic value to justify their perception of fairness.


Sellers may perceive the intrinsic value of their business as unfair, given the years of dedication, sacrifice, and investment in technology, products, and teams.


Reaching an agreement on fairness can be challenging, but that makes my job fulfilling!


If a buyer is willing to pay a premium above intrinsic value, they need to justify it. It's up to the seller to help them with that. That's why I believe M&A is first a value communication exercise.


Marc Andreessen once said:

The great thing about communication is that most people are terrible at it, because they never take it seriously as a skill to develop.

What's fantastic is that even a slight improvement in communication skills can make a substantial difference.


In M&A, effective communication starts with understanding what value means to a buyer. I've noticed that the CEOs who understand value best are the ones from whom we've obtained the highest premiums.


Therefore, today, I'm sharing an insightful framework — a formula crafted by Alex Hormozi, a well-known marketer, to determine what defines value from a buyer's perspective. The Value Equation formula:

Dream Outcome x Perceived Likelihood of Achievement/Time Delay x Effort & Sacrifice = Value.

The Value Equation by Alex Hormozi


As you can see from the picture, there are four primary drivers of value. Maximizing value involves increasing the drivers at the top and reducing those at the bottom.


The power of this formula lies in its mathematical principle: Maximizing value is about reducing the denominator to zero.

The closer the bottom gets to zero, the more the value tends toward infinity.

I'll explore each of these value drivers and illustrate their relevance in an M&A context. The goal is to clarify these value drivers, enabling buyers to justify paying a premium.


Dream Outcome


The Dream Outcome embodies the aspirations a prospect aims to fulfill.


The central idea here is 'prospect,' highlighting a fundamental mindset shift.

Indeed, my primary focus with CEOs is to urge them to consider M&A partners not just as potential buyers but as potential customers.

In that sense, an M&A process is not about giving the opportunity to acquire business attributes (client base, product, technology, team) but is about giving the opportunity to solve a problem.


For example, a 45' demo pitch is about something other than presenting awesome product features. It's about gaining insights into their challenge and objectives.


When we really understand what M&A prospects are struggling with, we can speak their language, demonstrate empathy, and illustrate how our business attributes can contribute to their success.


The funny thing is that CEOs do that process perfectly with their own customers but tend not to reproduce what made them successful with M&A prospects — hence the importance of the mindset shift mentioned earlier.


Nevertheless, an M&A prospect aware of a problem will always have numerous alternative solutions.


Consequently, increasing the Dream Outcome part of the equation has its limits.


Similar to any purchasing process, M&A is not about being the best but about being different.


Differentiation comes from the other three variables in the equation.


Perceived Likelihood of Achievements


The conviction regarding the ability to reach the Dream Outcome.


Perception is key in shaping convictions, and people pay for certainty. The concept of certainty emphasizes the value of knowing and appreciating risk.


M&A is one of the riskiest alternatives for a prospect to solve a problem. Yet, if it pays off, it can deliver the highest return on investment.

M&A is a classic case of high risk, high reward situation.

Simply emphasizing the potential ROI of a well-crafted synergistic Business Plan isn't sufficient.

Increasing the Perceived Likelihood of Achievement is far more effective when mitigating the High Risk associated with M&A.


By prioritizing Post-M&A Integration early in the process, transitioning from a high-level narrative (Dream Outcome) to an iterative approach with the buyer, we can position our M&A opportunity as one with Low Risk but High Reward potential.


Such opportunities with asymmetric risk are rare, and scarcity significantly impacts the perceived value.


Time Delay



The short-term, immediate wins before achieving the Dream Outcome.

One common source of frustration among CEOs I encounter is their feeling that buyers undervalue synergies in their valuation assessments.


Making continual references to synergies in an effort to secure a better valuation outcome rarely pays off. One thing I've noticed that often works is minimizing the perceived time between a buyer's purchase and when they start seeing value.

This involves demonstrating concrete proof that synergies works before the M&A.

It's a well-established fact that having past experiences, sharing similar use cases, and having a track record significantly increase the confidence a prospect has about a solution during their buying process.


This principle is just as relevant in M&A.


I've written about the importance of building active working relationships before engaging in an M&A.


This might involve implementing commercial alliances with your prospect, applying to a Request for Proposal against/with your prospect, etc.


These activities provide tangible evidence that synergies are already at work, thereby minimizing the perceived time delay — and give the M&A prospect confidence that the journey is worth it and doable.


Effort and Sacrifice


The hidden cost of achieving the Dream Outcome.


A common misconception in M&A is that the cost of M&A is limited to the price offered by the buyer.


However, this overlooks the resources a buyer must invest to extract value from the acquisition.

These hidden costs severely discount the price.

Revealing and mitigating these hidden costs significantly impacts the price.


There is a reason why Xanax is a multi-billion dollar product for people who want to decrease anxiety, while Calm lies in the hundreds of millions range. Meditation comes with physical and mental discomfort, and you have to set time aside every day to do it while swallowing a pill is easy.


Tackling these hidden costs head-on and preemptively is a practical approach to diminishing the perception of effort and sacrifice.


By doing so, buyers are spared the effort of uncovering them and can avoid any unpleasant surprises that might adversely affect them.


Additionally, there's a distinct contrast between letting the buyer discover potential hurdles and actively addressing and securing the risk factors you've identified and addressed upstream.


To wrap up, I leverage this framework as a foundation to influence how M&A prospects perceive these value drivers.


However, focusing on these value drivers rather than just their perceptions is a more effective strategy to maximize value.


I hope this framework will serve as a backbone for crafting exit strategies!


Good luck

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