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Negotiating OOH in a Vacuum

Insurance Insurance Everywhere  

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OOH…Here’s One Thing

by Jim Johnsen,
Managing Director, Johnsen, Fretty & Company

My friend Bill Board, was kind enough to invite me to write a periodic #OOH column.  Since I am a man of few words, I promise to keep my riffs short and focused on one thing.

 

Bill Board: “Hey Jim how’s the article coming.”
Jim: “Hey Bill, given that its St. Patrick’s Day and I know I have some Irish in me somewhere (don’t we all?), I’m really struggling this week. Got any ideas?”
Bill Board: “Yeah Jim.  I was thinking that the outdoor community would love to hear about insurance. After all, its such an exciting subject, and something us Out of Homer’s wake up thinking about every day, right?”

 

Insurance Insurance Everywhere  

Every once in a blue moon, I dream about going back to school to get a real education. One that delivers the Dr. before the surname when you are done. If that’s not nuts enough, I already have my doctoral thesis picked out. The thesis would set out to prove that almost every person on the planet is an insurance underwriter…almost everyday! Said another way, there’s insurance in everything we do, but the good majority of us really forget to think about this when we conduct small and even large transactions.

the “insurance” is wrapped in the transaction

Hard to imagine right? When was the last time that you ordered a Grande/Quad/Non-fat/One-Pump/No-Whip/Mocha (or such other thing) at Starbucks and said to yourself, “of course it’s so expensive because they sold me insurance along with that beverage.” I would argue that, the “insurance” is wrapped in the transaction. They are promising to deliver a beverage, no matter how exotic, that will exceed your expectations. You are willing to shell over more than any reasonable person would pay for that coffee beverage, because you trust them completely. Okay, here’s where it gets a little dicey. What’s the difference between trust and insurance? In my book not much. Insurance is just an enhanced version of trust, supported by a policy.

Okay, maybe an example closer to home might resonate. A guy you don’t know with an air freight business, walks through door with his hair on fire and tells you he needs to buy one of your avails for the next 6 months so long as you toss a vinyl in for free. He needs to know immediately if he can have it. Do you:  a) give him the price you gave your car dealer buddy earlier in the day, b) give him rate card or c) give him another price? I love to hear from readers as to what their thoughts are, but mine is, you had better price an adequate “risk premium” in there (yet another word for insurance) to get paid for the risk you are taking with this wingnut. And rate card may not do it. So when he says “why so expensive”, tell him it really isn’t, it’s just that he received the insurance package too.  

negotiating price…in a vacuum.

In the mergers & acquisitions world, insurance is incredibly important, and yet after 30 years of doing deals, I still can’t believe how many buyers and sellers ignore or undervalue the risk premium and instead spend much more of their time negotiating price…in a vacuum.

the seller wants to make sure that his drink with an umbrella in it, doesn’t get interrupted by a buyer who mails in a bogus claim post-closing

So what is this risk premium I am referring to? There are many risks before and after in an M&A deal, so its hard to pin it to one, but by way of example, the buyer wants assurances (another word for insurance!) that it got what it bargained for after close, and the seller wants to make sure that his drink with an umbrella in it, doesn’t get interrupted by a buyer who mails in a bogus claim post-closing. As much as I hate to admit it, lawyers (at least the good ones) realize that a purchase agreement is an insurance policy by another name and will draft accordingly. This is tremendously valuable for both sides. But again, all too often, the horse is out of the barn relative to how the risk premium was priced.

you may be giving away the product or service (or the money as the case may be) too cheap.

I digress. Sometimes I get carried away when someone mutters the word M&A. Its like when dog shouts “squirrel” in the movie “Up”. The bigger picture here is, to look for and recognize the “insurance” component in every business transaction you conduct. When you start looking at the world through this lens, I think you will come to realize that you may be giving away the product or service (or the money as the case may be) too cheap.

Jim: “Well, Bill, how did I do?”
Bill Board: “Ahem…it needs a little work, but I will let you get back to your Guinness.”

Jim Johnsen

 

jfco.com
Securities transacted through StillPoint Capital Member firm FINRA/SiPC

 

 

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