True Value
This story appears in the January 2001 issue of Entrepreneur. Subscribe »
"Is it worth it?" That simple question is the "to be or not to be" of any deal. Like a master jeweler closely inspecting a precious gem, every dealmaker should examine the question from every angle. That's because the more tools you have to measure value, the more likely it is you'll cut a sharp deal.
A speaker and attorney in Los Angeles, Marc Diener is the author of Deal Power: 6 Foolproof Steps to Making Deals of Any Size(Owl Books/Henry Holt). You can reach him at MarcDiener@aol.com.
The Upside
When it comes to worth, you may as well start at the beginning: dollar value. You'd think that would be simple, but it's not. There are dozens of ways to calculate value, some better than others, depending on the circumstances. For example, you can price an asset based on its historical cost, less depreciation-but this may have no relation to economic reality or fair market value. Using replacement value is relevant only if you can replace, license or recreate the item in question.
Earning potential is a more sophisticated approach, often used to value an entire enterprise. Professional appraisers have numerous for-mulas to compute earning potential, such as multiplying projected annual profits or sales (after-tax earnings or dividends) by an accepted industry multiplier called a "cap rate," or discounting some estimate of future cash flows. As you may imagine, tech-nical problems abound, and the numbers you get depend on your assumptions, your accountant and the cap rate you choose.
Assessing the long-term potential of your deal is another factor to consider-and it's more about being in the right place at the right time than about specific numbers. When the strategic advantage of an entire product line, service or market is in question, long-term potential is a critical factor. To get it right, you need to be part analyst, part visionary.
Subjective value, which focuses on what personally turns you on about a deal, should also be considered. Will you work with good friends? Visit your favorite city more often? Fulfill some lifelong dream? Clearly, this consideration "ain't about the money."
The Downside
There are significant negatives to be weighed. Risks permeate every deal, as they do life, and as far as I know, there's no way to identify all the dangers. In certain deals, particular risks will jump right out at you; in others, they just lie in wait. Either way, deal-makers face risks from nature, current events, dishonesty, bad judgment and incompetence.
Factors-like opportunity costs-aren't just theoretical. The money you could have made by making a different deal is all too real, as are the seemingly always-greener pastures along the road not taken.
Also, don't underestimate transaction costs. The larger and more elaborate your particular deal, the more time, energy and money (think of professional fees, travel, phone charges and the like) you'll spend closing it. And deals made in one area may require further spending in another. For instance, you may buy new machinery at the right price, but then need to install it, retool other equipment and adjust your assembly line.
Finally, there's the most obvious downside of all: what the other side wants. Consider all the factors above as if you were in your opponent's shoes. This not only helps you better understand the deal's true value, but it also helps you better understand the other side so you can negotiate more effectively.
Remember this: You'll be thinking about what your deal is worth well after you sign on the dotted line. So take the time now to consider the pros, cons, terms and conditions. You'll be glad you did.
