Are you asking about business valuation or business pricing?
Price is not always value. Sometimes it will be. They are usually different numbers. The degree of difference will change with circumstances. Sometimes the degree of difference will be small. Often it is very large.
Here’s what I mean:
- You buy an asset for its ability to improve your life. If buying your daughter a car will improve her life, it will improve yours too. The asset has value.
- Buying gold improves your security in troubled political times. The transaction has a price to add value to your life. That value is a last resort store of wealth.
- The price of Bitcoin has started to move again. Bitcoin still provides the same utility as it did last month. It is still a means for universal autonomy. We can still trade it around the world with as much ease as before. As much ease as when it was changing hands at $18,000. As much ease as when it was being sold for $4,000. The value of Bitcoin has not changed wildly in the last two years. Its price has.
The value of a business is an expression of what the owner currently gets out of it, and what he will get out of it in the future. He can sit tight and wait to get out of it what he expects but at later dates. Or he can offer the business to another person at a discount to those future cash flows. The essence of discounted cash flow valuation.
The key to value based on what you will receive in future times is the risk that those cash flows will not happen. But you know the ins and outs of your business.
- You know how to deal with its creditors.
- You know how to twist the screws to get its debtors to pay on time.
- You have a good understanding by now of how the inventory cycle works.
- You have been down a road with your staff members.
- You have a deep understanding of what competitors are up to.
- You know what marketing efforts have worked in the past.
- You know about the wasted money on marketing failures. You won’t do that again.
To you; the risk in the business is small. So if you were to buy your own business, you would be happy to take it at a small discount to its future cash flows. Because… certainty.
By contrast, someone looking to buy your business has a lot of uncertainty. His learning curve will be steep. And yet you want to limit the hand over period to one month. You see the problem here? An uncertain buyer sees lots of risks. Of course, his value discount is going to be higher.
Now, do you understand the disconnect between a willing buyer and a willing seller? As much as you disclose “all pertinent information”. And as willing as the parties may be. No matter how much funding is available. The risk to the buyer is much higher in the raw and even higher in her own perception. There is no getting away from it.
Your job as a business owner (who will exit someday) is to reduce risk to your buyer. Your efforts will gain you a smaller price to value discount. If that sounds obscure; it means you will sell for more.