When a business is sold, it may sell for more (or less) than the appraised value. Sometimes this doesn’t make sense to laypeople, but valuators understand that there are many valid reasons why price and value could be different. Small business owners that understand this subtlety are better positioned to make informed decisions.
Price vs. Value
Price is specific to an individual buyer and seller. It’s the amount of money for which anything is bought, sold or offered for sale. It requires an offer to sell, an acceptance of that offer and an exchange of money (or other property).
Conversely, the term value often refers to fair market value in a business valuation context. Fair market value is essentially a consensus of what the entire pool of potential buyers would agree to pay. In the real world, sales may occur for more or less than fair market value, for any number of reasons that are specific to the buyer or seller.
Timing is another cause for the diffence in value and price. Often a valuator’s work is done long before the company is sold. Differences in market conditions or the company’s financial performance between the two dates could cause the company’s selling price to vary from its appraised value.
Price and Value Are Not Synonymous
Buyers and sellers need to understand that the appraised value of a business may not match its future selling price. They may, in fact, vary substantially, based on the purposes specified in the appraiser’s report as well as the effective date of the report.
When the purpose of a valuation is to establish an asking (or offer) price, valuators typically provide a range of values that considers various buyers and transaction scenarios. This range can help a buyer and seller arrive at a reasonable selling price that’s based on the individual parties’ expectations of risk and return. If planning to buy or sell a business interest, contact Filler & Associates for guidance.