The value and the price of a business are two distinct concepts that often lead to confusion in the minds of buyers and sellers. A number of “great thinkers” have looked at these two concepts, and their quotes give us food for thought.
Let Us Quote In Four:
– “There is no absolute value in this world. You can only estimate what one thing is worth to you. Charles Dudley Warner
– “The price is what you pay; value is what you get ”Warren Buffet
– “A cynic is someone who knows the price of everything and the value of nothing” Oscar Wilde
– “The value is calculated, the price is noted” Anonymous
In mathematical terms, we could say that price is a first derivative of value. As CD Warner points out, price is value for yourself. Indeed, a “strategic buyer” (competitor, investment fund, group) will analyze a target in terms of synergies, economies of scale and strategic interest. This buyer will then be able to offer a price much higher than that offered by an individual buyer who will base his calculations on the intrinsic value of the target alone. In this sense, the price corresponds to the perceived value.
The price is also, and above all, the result of a negotiation. The law of supply and demand, competitive intensity, the nature of potential buyers are all elements that participate in setting the price on an amount. Thus, “intermediated” files are subject to a real price escalation, since the commissioned firm organizes the competition on the file by listing a large number of potential buyers to maximize the transaction value on which it is remunerated. In this sense, the price corresponds to the negotiated value.
For financiers, the price is somewhat like a second derivative, the result of the perceived value of the target combined with the potential added value of the buyer.
Beyond these attempts at mathematical comparisons, price appears above all as a fundamentally subjective notion, far removed from “5 times EBIT”. EBIT is the abbreviation for “Earnings before interest and taxes”. This abbreviation corresponds to the operating result (REX) in French accounting, that is to say the profit before deduction of charges, interest income and taxes. EBIT includes net sales from which are subtracted the operating expenses appearing in the class 6 account (salaries, general expenses, energy, charges, etc.). It is better to seek sound advice from the experts. Correctly carrying out the financial valuation of a company involves mastering several accounting and financial techniques, After you have estimated the value of the desired business, negotiation of the sale price with the transferor can begin.
Ultimately, it is the negotiations that determine the final sale price of a business, valuation being only a way to get a coherent idea of the value of the business and to set a limit of supply.
The sale price of a business can change when several potential buyers compete to take it over. Buyers are ready to increase their offer in order to prevent a competitor from getting ahead of them. The value is therefore in a few words very difficult to define and above all does not require to be approximate.