The Fair "Quantum" Value of a Business

Edwin Schrodinger used a famous thought experiment to try and explain part of Quantum theory. The experiment placed a cat (now known as Schrodinger's Cat) in an unobservable place where after some time there was a 50/50 chance the cat would be either dead or alive. Quantum theory considers the cat to be in a state that is both 50% alive and 50% dead until an observer sees the results. At that time, the probability fields collapse and the cat is either alive (although quite annoyed) or has forever passed on.

This finally answers the ancient philosophical question if a tree falls in the woods and no one is around to hear does it make a sound? We now know that the answer is "probably".

The IRS has defined a term Fair Market Value in Revenue Ruling 59-60 as:
"... the amount at which property would change hands between a buyer and a willing seller when the former is not under and compulsion to buy and the later is not under any compulsion to sell, both parties have reasonable knowledge of the relevant facts."

Such a simple definition creates many probabilities. The least useful are a seller's hope of how much it could be worth and a buyer's hope of how little. There are 3 reality-based paths to approaching the problem:
1) Asset Approach - the replacement cost not considering earning power
2) Income Approach - a discounted estimate of future cash flows
3) Market Approach - comparisons of similar businesses which have sold in the past.

Each of these methods have multiple methodologies which all yield different results and all of them have their appropriate application for specific buyer and seller circumstances. It is the job of the evaluator to accurately assess values based on all of them and then create the combination of probabilities that best represent the scenario described in IRS 59-60. They have to value the state of Schrodinger's cat before the observation. It's a professional opinion that needs to be done by a CPA Accredited in Business Valuation (ABV) or a Certified Valuation Analyst (CVA).

A survey by Inc magazine concluded the 75% of privately held businesses listed for sale do not successfully change hands. The culprit is generally the price. The seller has one probably in mind and the buyer another and they cannot agree. A certified Fair Market Value creates a common anchor for both parties to use in coming to an agreement. Having this common anchor creates the quantum Probably Field that almost always leads to agreement and a successful business sale.

What has happened is the intense observations already done during the valuation pre-collapse the quantum probably fields to a region known to be acceptable to the seller and limiting to a buyer. It's interesting how the intricacies of sub-atomic particles mirror the intricacies of complex business transactions, yet it's all the same universe always acting in the same way.


Image Credit: skuds

Critical Point Analysis

Clockworks have long been metaphors for systems in general. They illustrate energy transformation, cyclical behaviors, information encoding, and much more. One aspect of systems they clearly illustrate is the existence of a critical point.

Imagine the power involved in controlling the heavy hands of a large tower clock. The drive gears must exert crushing force to keep the hands at exactly the correct position. A critical point analysis of the clockworks would be an effort to find a point in the system where the movement of those hands could be stopped with only the pressure from a single finger. In this example, it's the flywheel. Stop the flywheel and everything else halts. That's a critical point and it's the spot of greatest advantage to any planned system intervention.

Business is an incredibly complex system with hundreds of gears (relationships) that mesh together to make it work. The idea that a critical point may exist in a business is difficult to prove; but since the clockwork metaphor seems to be working, it's worth exploring. If there was a critical point in a business, how could we identify it? What would it look like?

Within the clockworks the parts with the greatest mass and largest energy requirements, the hands, are also also the slowest moving. Our critical point, the flywheel, has little mass but is in continual motion. The critical points exhibit speed and repetition but not a lot of substance.

These characteristics are what make ideas critical points. Once an idea starts to spread, the heavy hands of execution begin to move. Internet and advertising consultants tell us extended repetition of a message (the idea) is far more powerful than a single large presentation. A business works because the people involved believe in it.

Critical points have the same characteristics we've already found in the powerful creative forces of nature. They are Gentle, Powerful, and Repetitive. When we find a critical point and dedicate ourselves to it, like an Archimedes who has finally found his place to stand, we can move our world.

Image Credit: poltag

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Our Invitations

Invitations take many forms, from the formal printed style seen here to the subtle courting signals every society develops. They are powerful tools that open the doors of significant relationships and because of that we handle them with great respect.

Every piece of marketing material should be considered an invitation. We invite the market to experience our product or service; however it's often done in a strange manner. We use a cost benefit analysis approach. There is no doubt that before an invitation to do business is accepted, a prospect will consider costs and benefits; but to base the invitation on this design dehumanizes the prospect and commoditizes the business.

Imagine being an Event Planner rather than an Active Investor developing a marketing strategy. Successful events always have a feeling that is forever kept in the attendees memories. We often forget the details about exactly what happened at an event; but we will continue to remember how it made us feel. Business transactions are similar social events, especially those of an introductory nature. As we are invited to potential business opportunities feelings are remembered as much as any transactional benefits.

Since advertising and networking have become facts of life in American business, we're all continually exposed to them. They are forms of invitations. What will be remembered is how they make us feel. No matter how timely or creative it might be, unsolicited email feels like spam - disrespect and nothing else. On the other hand, even the coldest of calls that includes a sincere request for advise feels like appreciation. Invitations invoke our feelings.

In response to our rhetorical question, "Do you need a written invitation?" the answer is generally "It certainly wouldn't hurt."

Image Credit: Matt Biddulph

Risk and Reward

Every investor, active or passive, has in mind a financial risk/reward relationship. They have to decide exactly what degree of risk they are willing to accept in exchange for higher rewards. Passive investors generally see single digit returns these days which is one reason why there is so much interest in the much higher returns of your own business.

So why doesn't everyone want to jump on higher returns? Passive investors (people who invest in someone else's business) only concern themselves with financial risk. Running your own business also creates another form of risk, personal risk. When you're in charge, not every effort is going to work the way you planned. You can be rejected (or more accurately, you will be rejected). You are subject to frustration and self-doubts. These are just some of the personal risks each Active Investor much face.

Is it worth it for just the financial rewards? That will depend on the circumstances. What is always true is that overcoming personal risk produces personal gains of enormous benefits. In countless biographical examples, people with great satisfaction from their lives have all overcome personal challenges. Active Investors assume a double risk and receive a double reward. Both their financial and personal net worth evolve.

So what can we do about Risk Management when the topic is Personal Risk as opposed to Financial? As I was writing this posting (talk about JIT) I meet with Jeff Weaver, a Texas serial entrepreneur who spends a great deal of his time coaching and mentoring others in addition to developing his own businesses. His strategy is to move out of judgment and move into curiosity.

We worry about that last phone call or meeting. Did we say the right thing? Were we weak, or were we offensively pushy? Are these the right people? Are we doing the right thing? Every one of these internal questions comes with an implicit self-critical negative answer. That's our humanity (Ego) at work. It's what Jeff means by judgment. What if that changed to personal curiosity? We can be equally curious about that last encounter. We can review it with a sense of wonder about what will happen next. Who will we meet as a result? What will they tell us now? What new opportunities have started to emerge?

When we learn to think this way instinctively, Personal Risk converts to Personal Adventure. That's a good thing.

(For those with an interest in how this works out on a theological level, try applying it to the Kingdom Parable in Matthew 18:23 -35. An attitude of curiosity encourages a spirit of forgiveness.)

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Finish Strong

I can still remember the game that made me a Dallas Cowboys fan for life. I was eleven years old and living in Houston. At that time Texas had the semi-pro Texas baseball league; but there were no major league teams in any professional sports.

It was 1960 and the NFL announced the formation of the Dallas franchise. The original Cowboys were selected from "unprotected" players on other teams. They were also the unlucky 13th team in the league.

Frustration was the reward for following the Cowboys that first season. They could lead for 3 quarters but NEVER win, including giving up 17 points in the last 6 minutes of their first encounter with San Francisco.

After 10 consecutive losses we were thankful the season had only 12 regular games. Game 11 was against the New York Giants, where our Head Coach Tom Landry had been an assistant coach the previous year.

Even with a slow start, the Cowboys managed to stay in this game, catching up to the Giants but never able to stay there. The 4th quarter began with another Cowboy's come back to tie the game 24 - 24. The reigning conference champion Giants didn't let that last. Soon they had the game back with a 31 - 24 lead. With 2+ minutes left, the Cowboys took advantage of a New York fumble and scored. It was 31 - 30 in the final moments of the game with Fred Cone lining up to attempt the extra point. None of us listening to the game dared to even think about what might happen. The ball was snapped, placed, and kicked through the uprights. We had tied, 31 - 31! It was the first major league professional game Texas had not lost. We had a right to be there; and I was now a Cowboy's fan for life, even though I wouldn't live in the Dallas area for another 30 years.

Everyone knows we should finish strong. That gets confused with winning and it's not the same. Every transaction can end with increased value, even if the result is not what we had in mind. An Active Investor is alert to any value that can be gained; no opportunity need be wasted. If nothing else, can a final result create an increase in trust between us? There is always an audience; will our finish create fans?

No, the Cowboys didn't win that game (or any 1960 game, the season was 0 - 11 - 1) but they had what it takes to finish strong. That won them their original lifetime fans. No, the Texans didn't win at the Alamo; but they won many hearts and we will always remember. They finished strong and that spirit was later at San Jacinto where a vastly out-numbered Sam Houston defeated Santa Anna with courage more than military strength.

We can't count on always wining. We can always intend to finish strong.

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