What is my business worth?  How do I find the value of my business? How much can I sell my business for? Right out of the gate business owners want to know the answer to these questions.  The real question should be if all of these questions are going to receive the same answer?  I think a seller would say yes, but a buyer would have to disagree.

What is the difference between business valuation and sales price?  To keep it simple, value is an assumption often based on a mixture of facts (statistics) and opinions.  Sales price is what someone will actually pay for the perceived value.  Don’t mistake the two as the same.    The hope is that a good valuation matches what a buyer will pay but don’t forget that buying is an emotional transaction.  That’s why auctions generally sell at a higher price and why stores pack everything on the check out counter as a last minute “need”.  Think about how many times you have gone to the store and left with only what you came in for?  Be honest, rarely, if ever.

Think about Elvis Presley’s hair that was just sold for some ridiculous price at an auction for ten’s of thousands of dollars.  Honestly, I don’t remember how much because I was channel surfing, but it was alot for a pile of hair.  In that auction there must of been a value put on the hair to start but what should the sales price be?  Take EBay as another example, this is an online auction house for everything that you want to get rid of, or actually what my wife wants me to get rid of, but that’s my story.  I list items at my perceived value knowing that the actual sales price will being negotiated.  I might have done research on what else has sold that is similar, evaluate unobjectively about why my protect has higher value, but basic economics of supply and demand will determine the final sales price.

Let me try this one more way because entrepreneurs generally are stubborn and rarely, and I mean extremely rarely, admit when don’t know something.  Put yourself in southeast Florida on a beautiful sunny afternoon on the beach and you decide to come home and work on some house projects. You stop by the local hardware store pick up 20 sheets of plywood (sometimes the stories have to be extreme to get the point across).  You pay the store price and head home until a huge hurricane come tumbling towards your town and everyone heads to pick up plywood to protect their houses from the onslaught coming.  As the store runs out of plywood, your truck load has just increased significantly in value and the sales price will grow depending upon the personal needs of the buyer.  Now you don’t sell it yet because you’re waiting to get the top sales price for each sheet but unfortunately, the storm changes direction and moves away from your town.  The value drops and no one is looking to buy from you any more.  What is the value and the sales price?    Is it what you paid for it, what you could have sold it for at it’s peak or the current price someone would pay?  It’s basically about supply and demand.

Your business might have significant value right now with lots of assets and profits, but sales values have dropped 1-3 time multipliers over the last year.  The sales price has just as much to do with external issues (financing, economy) as internal (assets, profit).  A business is alive and always changing so the value and sales price constantly change.    Home values are not alive, they are at a fixed location with no income, so the value and sales price can better be assessed.  Businesses are made up of people, with customers and products effected by supply and demand.  Everything always is changing so to get the maximum business value a good business owner must learn to manage all those pieces.

The answer here is that we as business owners can only manage our internal influences on the business to maximize the value while the external influences will eventually determine the sales price.  Both need to be in full click to get the maximum dollar.  You need to have a high asset and profit along with a strong economy and easy financing to reach the golden rainbow.  You can still sell it with only one of the pieces but real returns happen when both internal and external influences are flowing.

My advice is to constantly work on the internal value drivers until the external market comes back. Let’s all hope it comes sooner than predicted.

This entry was posted on Wednesday, October 21st, 2009 at 8:34 am and is filed under Sell Your Business, Emotional Selling, Buy a Business. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.