Author: David Mattocks
When the owner of a business asks: "What is my business worth?", do they mean what is the value of my business, or... what will my business sell for? In most cases, the seller is asking what price will my business most probably sell for on the open market.
Value and price are different. There is often a big difference between the value of a business and what it will actually sell for. Business Brokers and Business Transfer Agents are constantly approached to explain the difference between value and price, when preparing a business for sale.
In essence, a business valuation determines a value that can be irrefutably defended by a suitably experienced and qualified business valuer, or appraiser. A formal business valuation is usually called for when litigation, an Inland Revenue problem, or some other serious issue requires a specific and qualified value for the business to be established.
A price is the figure an experienced and accredited Business Broker formulates - employing several accepted methodologies - which, in their opinion, a willing buyer will most probably pay for the business.
Business valuers/appraisers find themselves in a difficult position. They can only value a business based on facts, figures, fundamentals, research and other realistic assumptions that are able to be resolutely defended. A formal business valuation - even when based on facts, figures and fundamentals - can be significantly higher than what a prospective purchaser is willing to pay for the business.
So what is it that creates this difference between the value of a business and the price? The easy answer is perceived value. In other words... what is the business really worth to the buyer? This figure is the value of the business as perceived by the buyer and subsequently, the price they will pay... the selling price.
There are several other factors affecting the selling price of a business. For instance, an all-cash transaction will generally result in a lower selling price than one that is part financed by the seller; and the longer the term of the loan, the higher the final selling price will be (once the loan is finally paid off).
Another example would be a case where, in exchange for a higher price, a seller who owns the land and building (in addition to the business) may not charge rent for the first 10 years so that the buyer has more working capital for expansion; or no debt service for the first 5 years of a 10-year note for leasehold improvements, and so on.
Favourable deal terms increase price, not value.
The lesson here is simple. Business appraisers can only value a business based on what can be defended. Use the valuation as a beginning (or ending) point of the selling process. Know the details of what you are using as a reference to develop your value expectations and understand that perceived value and actual value can be very different.
David Mattocks is the owner of Sunbelt Business Brokers in Southampton, Hampshire. He is the author of "How To Prepare Your Business For Sale" and the FREE 12-part email training course for owners of UK businesses, "Preparing To Sell Your Business". http://www.sunbeltsellsbusinesses.co.uk
Article Source: [http://EzineArticles.com/?Business-Value-Vs-Selling-Price&id=3649034] Business Value Vs Selling Price
