While I was searching through my blog from a couple years ago, I located this interesting two part blog...(part one today)
Recently, I have been involved in a number of conversations regarding valuation. How do you value a company? How do you value an individual and what they bring to a company? There are many accepted ways to arrive at both, but the truth of the matter is that it's all in the eye of the beholder. We color our perceptions by our experiences as well as our hopes and desires. A large part of the equation is the supply and demand curve that exists in the market and between the two entities. When you are the buyer, you naturally look to get the best value you can for your investment. If you are the seller, you focus on your potential and putting your best side forward. But what if you are both a buyer and seller?
Today, I spent some time reading about Sklansky dollars and G bucks in Phil Galfond's well known Bluff article. It inspired me to invent my own term to help discuss valuation. I'll call it Z cents. It can be applied in your approach at the poker tables, but has more to do with making informed decisions. It's also a nice play on words as I often like to pontificate in my blog (Z cents ~ Zimba's sense). So what is Z cents and how to we utilize it. It is more of a process than a forumula or currency. Its a way to evaluate the various factors that are important to you before making an important decision.
I have never relied solely on math, formulas and numbers when making my decisions. They play a part, along with other factors. I am also not just an instinctual person who instantly knows what the best decision is to make through some otherworldly feel. The best way I can describe Z cents is to say its an evaluation of the totality of the situation factoring in my priorities. It is my priorities that are primary. Self knowledge is key in this process. You have to spend time thinking about yourself and what you really want. You have to know your weaknesses as much as you know your strengths. When you know yourself and what you want you are prepared to evaluate the situation.
If valuation is fluid and essentially in the eye of the beholder, how do you find any agreement between two parties. This brings in the other key component in Z cents, compromise. Compromise is the art of trying to understand your potential partner. Whether it be business or relational. Without compromise there will be no meeting of the minds. There will be no deals made. I could wake up today and feel my business acumen is worth $100 million dollars, but if no one is willing to pay it and I never budge, am I still worth that amount? As a buyer, if I identify the New York Yankees as the most valuable sports franchise, will they agree to my $100 million price tag I assign to them from my perspective? How much to appreciate the other parties perspective is where compromise is negotiated. If I were able to throw a 150 mph fastball for a strike regularly, I might be able to command my $100 million from George Steinbrenner. If George were about to be killed by some mob guy for a bad outstanding debt tomorrow if he didn't come up with $100 million cash, he might agree to my offer. Timing and external factors are so important to valuation.
The reality is valuations change constantly depending on many factors. On a personal level they change most due to our priorities. If our priorities change, the valuation of something will rise or fall. The items intrinsic value hasn't changed, it is still the same thing it was before, but our estimation has changed because our perspective has changed.
I will try to illustrate the Z cents concept in action. Hypothetically, let's take someone who is trying to decide whether to work for a company or start his own. Each person in this situation would decide differently depending on their priorities. They must evaluate their priorities. One individual may be drawn to the potential windfall of a startup. That individual would probably be involved in many aspects of the company, working long hard to develop the business from scratch. They would relish that freedom and the uncertainty. They would sacrifice the security up front for the potential down the road. They would accept that the startup might fail as most do.
Another individual might choose the established company. They might value the security and infrastructure. They could build off the base to contribute what they can. They can afford to specialize and not have to do a little of everything. They can leverage the prior success to ensure future success of an established entity, helping to sharpen the processes already created.
Neither individual is correct in their choice. Neither choice is absolutely more valuable. What is important with Z cents is that they look within themselves to see what is the best fit for themselves. Have they fully evaluated their own circumstances, their wants and needs?
A friend recently messaged me that he was going to start up his own company with a couple friends. He has worked very hard for a small but very successful business the last year or two. He has felt at times as if he didn't have enough control and compensation for the level of his contribution versus others within the company. Just a couple years ago he was without a serious job or direction. He valued greatly the security and experience available at an established company. Today he is a more experienced and focused individual. He has confidence and knowledge he can take and apply to new business situations. He is taking a risk for sure, but he has evaluated his priorities and feels this is a wise choice. Whether it is or not only time will tell.
Lastly, I want to return to the question I posed earlier if you are the buyer and seller. In this situation you are both investing your resources and selling your capabilities to your potential partner. Marriage might be a good example of this situation. Not only are you investing in a partner, hopefully for life, but are selling that you are worthy of their lifetime commitment as well. You will need to evaluate your priorities as well as appreciate and compromise with your partner on their priorities. Sticking too closely to only own priorities without any compromise will find you alone most likely. Compromise is essential. Is it worth it saying you will never go to the ballet cause you don't like it, if it means you won't be with someone?
In the business world, if you are both a buyer and seller, it's usually a situation of becoming an owner of a business. You are negotiating purchasing a piece of the company while selling yourself as valuable to the business. You are thus on both sides of the fence. Compromise is also essential in these circumstances to achieve your goal as the two strategies are counter to each other. On the one hand you are trying to represent what you bring to the business in the best light, while on the other hand minimizing the value of the business so you can get the best deal. The key to effective compromise is to find commonality of perspective. Where can you agree? Where can you see from the same perspective? If the priority of the two parties is to work together and make each other prosper, compromise can be found and partnership made. If either party values their perspective to the exclusion of the other party's perspective, then no compromise and progress can be made. Is it worth it saying you will never give some % if the cost is no valuable partnership?
Z cent's contribution is to encourage those who find themselves in these situations of making important decisions to search within. Evaluate their priorities and desires. What are their true goals? What are those that can be compromised? What are their strengths and weaknesses and how do those best fit within the choices laid out before them? Don't focus on some outside formula or valuation. The only valuation that counts is yours. But don't make your valuation frivolously. Invest the time and thinking necessary. If you decide you are worth $100 million and no one will pay it, live with those consequences and don't complain. If you feel that by compromising you will achieve your goals and make you happy, then by all means compromise. Learn to be responsible for your decisions and don't blame others. Live by your decisions and learn from their outcomes. Z cents urges that you don't fool yourself into thinking you will never have to compromise to achieve your goals.