Why are they almost never the same?
In business valuation, it’s important to distinguish between price and value because – while sometimes they’re seen as the same – in practice, they’re often quite different. This dynamic is especially true in valuing small private companies, where data is typically incomplete and opaque, and markets are illiquid and rife with information discrepancies.
At EquityMaven, our mission is to help our customers “put a number to their years of hard work”, as quickly, reliably and affordably as possible. Underlying this mission is a desire to see our business valuations used to enable fair and fast transactions, for all parties involved. This is where the gap between perceived value and actual offered price can matter most – because it can kill good deals, sometimes before they even start, or cause needless cost, frustration or delay.
So, what’s the difference between value and price?
In short – value is what you believe something is worth; price is what you actually get paid (or pay) for it.
More technically speaking in the context of a business valuation, value speaks to utility – it’s the intrinsic worth – both financial and sometimes non-financial – something has in the hands of its owner or user. Put differently, value is a buyer’s willingness to pay for a product, service or asset (or, on the flipside, the seller’s willingness to sell it). As such, although value is determinable using robust academic theory, and quantifiable using valuation methodology grounded in this theory (like EquityMaven), it can be different for everyone. For interrelated reasons, it can also vary significantly from price.
Price, on the other hand, speaks to amounts, not beliefs – the amounts of currency paid to get something. Although there can be non-financial elements of a price, it is typically what a buyer actually pays in cash for a product, service or asset. By the time it’s agreed upon, it’s the same for everyone. Unlike value, price – once agreed – is what it is, not what others may think or perceive it to be.
But how is price determined, if it isn’t the same as value?
The short answer is negotiation. But this is a much deeper topic – one which we’ll unpack over a series of future blog posts, so watch this space.