Despite growing up near a golf course and now living in a town that has hosted numerous professional golf championships, I’m NOT a golfer. I own a set of clubs that might be 40 years old and I’m not really sure where they are.
I think one of the more interesting things about golf is that it is the basis of so many stories, jokes and colorful anecdotes. I was meeting last week and I brought up a story about golf legend, Ben Hogan that I find particularly humorous and meaningful. Here’s the story as published in the LA Times.
Hogan was playing Riviera. Now, Hogan never asked a caddie anything except maybe what time it was. But after his drive on 15, he looked at the ball, the green in the distance, and turned to his caddie and said, "What's the shot?" The caddie squinted at the green, threw grass in the air, and said, "Mr. Hogan, it's 146-147 yards." Hogan scowled at him and said, "Make up your mind!"
For those of you not familiar with the parameters of golf, an average hole covers a quarter of a mile or more and Good Old Ben wanted precision within 36 inches. I find that story interesting because Mr. Hogan is a lot like some other people I know, and you probably do too.
I encounter clients who are looking to sell their business and tell me they are just looking for a “ballpark” value – which is not at all what they want.
These are people who spend their days knowing where every nickel goes inside their business and will grind someone’s gears over an extra dollar in shipping costs on a six-figure shipment. Believe me, I’ve heard it. So, when someone says to me that their business is worth “5 or 6 times EBITDA, give or take” I just smile quietly.
OK, let’s say Old Ben owns a company. Let’s call it “Hogan’s Heavy Machinery Company.” He spends his days fighting tooth-and-nail over things like the cost of materials, tariffs and obsessing over how much to pay his people, all while keeping a watchful eye on the bottom line. Now let’s say that Ben’s company makes $5 million in EBITDA (for those who aren’t fluent in this stuff, that’s “Earnings Before Interest, Taxes, Depreciation and Amortization” – often used as a proxy for operating cash flow). Taking the comment above (multiples of “5 or 6 times EBITDA”), the company is worth somewhere between $25 and $30 million, just based on my 3rd grade math.
Am I really expected to believe that the guy who gets ornery over 3 feet of grass on a golf course is going to take a flier on $5 million in the value of his company…a company that he’s poured his heart and soul into for many years? Believe it or not, people do. I’m not sure why but I think sometimes when people think they know the answer, they really don’t want to know for sure - sort of a "right until proven wrong" mentality.
I don’t know, I never studied psychology.
In any negotiation, information is a necessary currency, whether you’re buying a car or a company. Suppose Ben’s company is really worth something like $28 million and someone shows up and offers $26. That’s in his estimated range, right? Maybe Ben takes that deal and leaves money on the table.
I’m not saying that a preliminary analysis of a potential selling price needs to be to 10 decimal places but when we are talking about a “ballpark” number it would be good to know whether the ballpark looks more like a little league field or Yankee Stadium. All I’m saying is that having some rationale and a sense for how things were calculated, up or down, could be beneficial when going into a deal. It could be the difference between landing on the green or dunking your ball in the middle of the pond.
And now some words of wisdom from people who aren't me:
"Golf is a game in which one endeavors to control a ball with implements ill adapted for the purpose" - Woodrow Wilson
"It is far better to buy a wonderful company at a fair price than a fair company at a wonderful price" - Warren Buffett
"It's what you learn after you know it all that counts " - Coach John Wooden
Thanks for reading and thanks for your comments. I read them all and I enjoy all the different perspectives.
Be good and be well.