The Business Transition Blog

Value vs. Price

Value and price are moving targets, different for everyone. There are many variables that contribute to perceptions about what your business is worth. Let’s say you believe your business is worth $1 million. But do you want:

  • Payment in cash so you can purchase a second property or invest wisely and diversify your wealth?
  • Payment in instalments so you have a guaranteed income for life?
  • Payment into a trust for your children?
  • Shares of the company that has acquired yours?
  • Donation to a charity of your choice to create a legacy?

In addition you must consider the buyer’s concept of value. Does the buyer want:

  1. A write-off to reduce taxes on another business?
  2. Your customer list?
  3. Your employees?
  4. Your technology, patents or intellectual property?
  5. Your unique products or services?
  6. Access to a broader, international market?
  7. Access to stronger purchasing power?
  8. Your location and/or real estate?
  9. A greater presence, control of, or monopoly in the market?
  10. Your reputation?
  11. Your predictable cash flow?
  12. Synergies that enable cutting of expenses and overhead to increase profit?
  13. Systems, processes and procedures that helped you become successful?
  14. Your website and social media presence?
  15. Your brand?
  16. Your expertise and abilities?
  17. Your entire operation to be managed by the new owner?

Initially, most people I talk with about transitioning their business think that their best option is the last one; but they haven’t seriously considered the others. With so many variables, you can see that value and price are quite different. For example:

  • You might have an easier time convincing someone to give you $7,881 per month for 15 years (at 5% interest) than a million dollars in a lump sum. You take some risk, reduce your tax liability, and enable the new owner to pay you out of profits created by synergies or increased sales.
  • You might be able spin off a part of your business that is not important to the new owner and sell it to someone else. For example, half of your $1 million valuation could include real estate that isn’t important to the new buyer because what they really want is your customers and employees.  You may be able to sell them what they want at your asking price and still keep the real estate.
  • You could leverage your $1 million by buying a life insurance policy that would pay $10 million to your family or favourite charity on your death and have the new owners pay the premiums.

There are many alternatives to consider. Ultimately, your business is worth what someone is prepared to pay for it. Think beyond what you believe is the way a transaction should go and consider creative ways to structure a deal that gives you and your acquirer exactly what you both want.