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a blog by Chris Barrow

The Shoe Shine Man

In the summer of 1987, financier Sir James Goldsmith was on a business trip to New York when he found himself early for a meeting.

He sat down in the lobby of the building he was visiting – to have his shoes shined.

The shoe shine man looked up as he polished and asked:

“are you Sir James Goldsmith?”

After the identity of his customer was confirmed, the shoe shine man went on to talk to Sir James about his small but growing equity portfolio and how he was throwing every spare dime into the New York Stock Exchange.

Sir James arrived for his meeting and asked his host if he could be excused to make a phone call.

This was to his UK stockbroker.

He gave the instruction to slowly and quietly start liquidating his £2 billion equity portfolio and to “go cash”.

The bewildered stockbroker asked why.

“Because when the shoe shine man is in equities, it’s time to get out.”

On October 19th, 1987, the world markets had suffered Black Monday and UK stock prices had fallen by up to 25%.

Sir James was in cash.

A few months ago I reported a record goodwill valuation for a dental practice at 8.25 times earnings.

Two weeks ago that record was broken, when a prospective new client shared with me the valuers initial indication for the proposed purchase of an (admittedly long established and well run family dental practice) at…

….8.5 time earnings.

Now let me confirm that this was a valuer’s estimate and not the actual price paid.

In fact, my first response was to ask is there had been a typing error?

My second response was to advise my prospect that he would be nuts to buy at that price.

A free market sets its own price – I fully appreciate that.

A free market dominated, however, by Private Equity and Board Room members salivating at the prospect of flipping, floating or flogging (the triple “F”) is a very different proposition.

A world in which the private individual is playing goodwill roulette.

In 2007, Duke Street paid £77m for Oasis.

In 2013, they flipped it to Bridgepoint for £185m.

Now Bridgepoint are ready to triple “F” – at a rumoured £600m.

One wonders whether the intrinsic value of the business has increased 8 times in the last 9 years? Or whether the free market will absorb that price?

It will be interesting to see what happens.

Is the shoe shine man in dentistry?

Are dentists (and others) who don’t really understand the economics of valuation or the day to day challenges of running a successful practice, trying to jump on a “get rich quick” bandwagon?

I don’t think it’s quite that bad. The budding hub and spoke people that I’m speaking to are experienced dentists and business people with a very stable head on their shoulders.

However, the valuations bouncing around at the moment are making it difficult for them to make progress as the vendors they meet are still bedazzled by the valuer’s promises of riches.

On the other hand, when the bubble does burst…….

Black Monday back in ’87 was preceded (do you remember?) by a huge storm in the South East of England.

I was lecturing in Tunbridge Wells on the Thursday night and woke in the early hours as a tree fell through the roof of Volvo parked outside my hotel bedroom. We drove a hire car back to Gatwick the next morning and had to weave our way along the M25, around fallen trees and abandoned cars, to get the last flight to Manchester before the airport closed. The scenes of wreckage on either side of our journey remain in my mind to this day – it was as if an atom bomb had flattened the woods around us.

The London Stock Exchange closed for the day and investors watched, helpless, as world markets collapsed.

No doubt Sir James was tucked up somewhere with a grin on his face, waiting to reinvest and ride the upturn (which he did and, for a time, became the richest man in the world).

I wonder when the great storm in dental practice valuations will come and who the losers and winners will be.

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