Negotiations to buy or sell a business in Alberta could be complicated when either party does not understand the difference between the business’s value and price. The price is the amount of money paid to the seller. The value refers to what the buyer gets for the money paid.
Calculating the value of a business is a mathematical exercise carried out by a valuator, based upon one or more of the following:
- Income: This approach bases the value on the business’s projected cash flow, as well as the likelihood of achieving those projections.
- Factors that influence projections: Intellectual property and goodwill could play an essential role in a value based on income.
- Assets: When using this approach, all liabilities of the business – like taxes and debt – are deducted from the business assets, providing the net asset value.
- Market-based: This approach bases the value on the current market, comparing the business with recent business sales involving comparable companies.
- Combined approach: An example of an integrated approach in determining a valuation is using the income-based method in conjunction with the market-based approach.
Reasons that might cause the value and price of a business to differ include a buyer with a different skill set than the seller. Emotions can also play a significant role in determining the theoretical value. A strategic buyer may consider purchasing a business to integrate into existing operations, adding to the theoretical value.
Negotiations between the parties could lead to a price paid in a combination of cash, earn-outs, shares or other structures to serve as a bridge between the price and the business’s value. Buyers of businesses in Alberta can typically expect a difference between value and price. Similarly, the seller must also be prepared to receive a final price that differs from the business’s theoretically calculated value.