Six times each year I chair a day-long CEO forum. CEO’s from different industries collectively work on a specific issue – we call these issues big rocks. The peer-support and learning is not only valuable, it’s at times, transformative.
For our most recent meeting, I brought in a guest speaker. Chris* is a billionaire and a sophisticated businessman. Throughout his talk Chris shared axioms that have guided his business practice:
When in doubt, act;
If you have to do the numbers with any precision, don’t do the deal;
Ask for what you want;
Own the pen, when negotiating deals
In addition to these gems, Chris offered a perspective on a business problem that completely shifted the thinking of everyone at the table (myself included!).
The Frame of Reference of Relative Value
One of the CEO’s (Ryan) owns and operates a sizable private mass-custom flooring business. An early financial partner in Ryan’s business wanted to liquidate his 20% shareholding so that he could repair his personal balance sheet. Curiously, the amount this investor wanted for his 20% was equal to the amount of cash he needed.
Not involved in the business, this partner had not added any operation or strategic value in its 11-year history and now he wanted the business to pay up in a time of cash-intensive expansion. Despite the fact that the shareholder agreement did not require Ryan to fulfill this request, the financial partner was taking legal action.
Like the other CEO’s around our table, I looked at this situation through one lens: you need the cash to grow and there is no requirement to pay out the partner at this time, so don’t do it. Also, why add more equity risk to Ryan’s personal balance sheet. No need to do it, so don’t do it.
Chris, the guest speaker, asked Ryan a few simple questions: What’s your current and projected EBITDA? What voting rights does this partner have? What is the amount this person wants?
After getting more of the facts, Chris looked Ryan straight in the eye and said: If you don’t want to pay him the amount he’s asking for then I will.
What? That’d be crazy, we all agreed. Why should this guy get a payday when there is no legal obligation to do so (not to mention the other reasons)?
Paradigm Shift to Absolute Value
Speaking for the group I asked, What are you seeing, Chris, that the rest of us are missing? What do you know that we don’t know?
Chris replied: Easy. You guys are thinking through the lens of relative value. From that perspective, all your points are valid. But what you missed and couldn’t see was that Ryan has a great opportunity to pay nothing for 20% of his company back.
Chris went on, I was thinking from the point of view [or paradigm] of Absolute Value. In other words, a share is a share and I was determining the absolute value of the shares. Based on what Ryan told me about his EBITDA and conservative projections, the shares are worth about $43/share. The other guy only wants $21/share. Therefore, if I were Ryan I’d get those shares back fast–it will cost him nothing in absolute terms.
This context shift from relative value to absolute value opened a whole new world of thinking for all of us. Because of this new way of looking, a new paradigm, we started to see the opportunity–before, our emotions and other value-limiting considerations were clouding the smart business deal.
Two weeks later, Ryan had concluded the deal. He now has 20% of his company back and at a bargain price. With just a turn in perspective, he went from feeling burdened to scooping a great deal.
When at the end of the day I asked my CEOs what was the greatest value from our time with Chris they piped up:
I didn’t even know I was in a paradigm.
Ya, and that paradigm blinded us!
The question, “where are you looking from?” is powerful and creates useful insight.
Ryan’s responded with a smile: $22/share.
*All names have been changed to ensure privacy