What’s Partnership Worth?
We had an exchange the other day with some folks who were trying to decide between selling some of their business to us or doing nothing and just keeping it (which is our biggest competitor). To help them make that decision, a spreadsheet got built that looked at how the business might perform in the future and then compared the cash flows that the sellers might receive were they to sell some now and own less later versus sell none now and take all of the distributions later.
It should go without saying that if the sellers kept 100% of the business, they would receive more money over time than if they sold. The reason for that is that any buyer requires a return on their money and that return is what you as the seller are foregoing in order to put the buyer’s money in your pocket today. But a today dollar is worth more than a future dollar and particularly so if the prospects of earning that future dollar are uncertain, so you need to discount those unpredictable future dollars to make an apples to apples comparison.
This is all vanilla present value/future value stuff, but where it gets interesting is when you start to think about how much of a discount those future dollars deserve. The reason this topic arose is because we modified the spreadsheet to show that we believe that it was worth about the same in total present value for the sellers to sell some to us rather than keep it all themselves.
To which they reasonably replied, “Well, sure, but you are using a lower discount rate on the scenario where we sell and a higher discount rate where we don’t. If you use the same discount rate, not selling is worth more.”
To which we reasonably replied, “Well, yes, we are using different discount rates, and while we could debate what the discount rates should be, we feel strongly that they should at least be different.”
And the reason they should be different boils down to the value of partnership. If you’re running a business on your own, without access to outside capital, and with no team of experienced professionals standing by to be helpful, are you less, equally, or more likely to achieve growth and success than if you do?
If your answer is less or equally, think hard about why you’re bringing on a partner. Because if you’re bringing on a partner, the answer should be an emphatic “Yes, the business is more likely to achieve growth and success with this partner than without it.”
And so your discount rates are different…
And so partnership is worth more…
As for how much more, well, that’s why this stuff is more art than science. But don’t just take my word for it. I’ll give the last word here to our friend and business owner Mike Botkin, who said this about a good partnership:
“Having a partner…is a cheat code. It’s a true 1+1=100. From nitty-gritty, to brainstorming, to strategic decisions, to just BS-ing on the phone…Having a partner in business, like life, is crucial and critical.”
– By Tim Hanson
