Why it’s Good: An interesting explanation for the all too common experience of business owners who inflate their valuation.
What it is: An article that discusses the Endowment Effect and its impact on business valuation.
It’s so common — a business owner has complete confidence that their business is worth twice what the market says.
Do you have a good rationale for what you think your business is worth? Do you know how to overcome the Endowment Effect?
Not putting a check on how the endowment effect impacts a business owner’s judgment can wholly impede a transaction from occurring and perhaps keep the business owner from achieving his or her desired goals. Business owners can try the following to consciously combat succumbing to the endowment effect.
- The endowment effect is human nature.[5] To combat natural proclivities you must first be aware of its existence. Recognize your bias.
- Attempt to take the emotion out of it. Understand where you have created value and where you have not. Things like cost basis, sweat and tears, and other intangibles (and even some tangible items for that matter) are irrelevant.
- Greg McKeown, author of Essentialism, suggests to try and pretend like you do not own it (whatever it is…your business or some other asset) yet. Put differently, channel your inner Atticus Finch and walk in the other person’s shoes first. View the situation as if you were the buyer rather than the seller. What would you pay?
- Hire knowledgeable and experienced advisors well versed in business valuation and market terms (i.e., an investment banker) to help manage your expectations…and actually listen to them!
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