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The Value Versus the Sale Price of a Company

Posted in Minuta Empresarial on El Nuevo Día, Monday, October 3, 2022

Written by: Jesús Daniel Mattei, CFA Rockelis Partners

 

The price of a product or service is black and white: a liter of milk costs so much and that's it.

So how much is your business worth? It's here that the price of a good versus its value is considered.


Acclaimed investor Warren Buffet explains it well, "price is what you pay, value is what you receive." Value is subjective: the same thing can have a different value for different people, times or situations. Thus, when one party in a buy and sell transaction has an interest in acquiring a company and the other party has an interest in selling it, each party attributes a certain value to it by applying different valuation techniques; the potential to generate cash, wealth and long-term value creation is also considered.


The price, on the other hand, is objective, the result of the agreement between the buyer and seller. In a valuation process, the value of the company is estimated as an objective reference point to inform the decision making. Usually, companies are valued by responding, for example, to a search for investors, financing or the moment to make an acquisition or merger. The value of a company is also calculated for legal and contributory applications.


In addition, there are concepts and foundations to calculate the value of a company according to the type of the sector in which it operates. Therefore, it is necessary to consult an expert advisor who develops a strategic plan based on a carefully curated analysis.








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