For those who exalt themselves will be humbled, and those who humble themselves will be exalted. Matthew 23:12 NIV
Those of us who make our living in traditional businesses, like distribution and manufacturing, often find ourselves scratching our head at the business decisions made in the world of high finance.
We watch in wonder as Facebook pays $1 Billion for Instagram, a company with 12 employees and no revenue. We are further amazed when, 30 days later, people put a $100 Billion market valuation on Facebook itself.
Recent acquisitions closer to home provoke the same sense of wonder. When we see distribution companies selling to foreign or private equity companies for double digit multiples or 100% of recent revenue we wonder what these people see that we don’t.
My personal experience with Private Equity fund managers dates back to the whirlwind dot-com days. I still cringe when I think of them referring to professional investors (many of whom were in their twenties and thirties) as “smart money” while calling strategic investors (industry people) “dumb money.” Really?
There are tons of people in this world a whole lot smarter than me. And some of these folks are very good at things I will never be good at. But what I know, I learned from hard earned life experiences. And here’s a few of them:
- The theoretical valuation of something is not what it’s really worth.
- People in an industry and market know more about their industry than people who aren’t in it.
- People who own a company know what their company is worth better than people who want to buy it.
- People who have never run and grown a successful business are less able to realize increased value on a business than people who are already doing it.
- People who overpay for a successful business always end up changing it in ways that undermine the reason it was successful.
As Forrest Gump liked to say, “That’s all I have to say about that.” But what about you? Feel free to share some of your personal gems with me in the comments section here. I’d love to read them.
Give Bill Weisberg a shout either in the comments below or @BillWeisberg.
This blog originally appeared on AD's website.