Assuming that you are an entrepreneur, you have undoubtedly asked yourself: what is the value of my business? Or you might be in the market to buy a business and wonder: what is a reasonable price for it. All legitimate questions.
Let me make some things clear first. There is no such thing as THE value. Neither for your business. And to make things even more complicated, value is not the same as price. Not infrequently these two figures are quit far away from each other.
But what is value and in what way does it differ from price? To start with the first, the value of a business is highly dependent on the opportunities that the person that is looking at the business, envisages. The value of a business is strongly determined by these opportunities, the earn back period and the cost that have to be spent to earn back the price. The faster and cheaper a buyer is able to do so, the more he is willing to pay. It is important to realize that these factors have little to do with your business, that you have little control over them, but in the end they do influence the buyer’s perspective and thus the value they assign to your business. The different perspectives of potential buyers allows them to assign different values to the same business. To avoid any disappointment due to this perspective, it is therefore extremely important to determine the perspective from which you want your business to be valued.
This also brings us to the value / price discussion. When you buy a business, the value you assign to the business is the maximum price you want to pay, preferably less. When you sell a business, the value is the minimum price you want to receive, preferably more. Based on this principle, it is not surprising that sellers are often disappointed with the first offer they receive from potential buyers and that buyers are often shocked by the price that the seller has in mind. When the buyer and seller have a value in mind that does not overlap, they can never reach a price that is acceptable to both and a transaction is therefore not possible. And as a wise man once said, a good deal hurts a little on both sides.
