Value or Price

It's not easy to value a business. This is not a complaint...in fact, it might not be a bad thing if it takes artificial intelligence a few more years to catch up with credentialed humans!

 

As the Roman proverb says: "Quot homines, tot sententiae." There are a few translations, but the rough meaning is this: "So many people, so many opinions." So it goes with business valuation. Even among credentialed analysts, if you give five of us the exact same set of information, you will almost certainly not get back the exact same answer from all five. A valuation credential does not come with Outkast's Golden Calculator to ensure uniformity of opinion.

 

Yes...I said it....a business valuation is an opinion. It is not objective, normative fact. Why would you hire a valuation analyst if they can only give you opinion, and not fact? I can think of a few reasons:

• Sometimes, it may be important to you to receive an opinion that comes from experience and subject matter expertise.
• If you find the right analyst, they can give you more than a number. They can articulate the thought process and the logic behind the number. They can even see other perspectives and help you understand why they landed where they did.
• Maybe you have to do so for legal or regulatory compliance purposes. Sorry, LLMs!

Think about the value of a Ford F150 pickup. Picture this truck in your mind. Give it a color. Extended cab? Four Wheel Drive? Is it brand new, three years old, or a classic 1973 Highboy? Now think about what it's worth. Not easy, is it? Are we talking about the price from a dealer off the lot? Is it a private party sale? Is it trade-in value, or maybe a wholesale auction value? That exact same truck may be worth different amounts in different contexts.

 

I'd imagine most would agree that just about any business is a more complex entity than a Ford F150. The inputs and outputs often contain human elements and endless variables. The marketplace for new and used cars is not perfectly liquid and efficient, but the marketplace for the vast majority of businesses (non-publicly-traded ones!) is pretty fractured and often opaque.

 

Most often, Blue Owl Valuation works to the standard of Fair Market Value (FMV). There are other standards out there, but this is pretty common for us. FMV asks us to contemplate the value for a "hypothetical, financial" buyer. This standard of value does not assume synergies, but mostly assumes continuation. One way to think of it is that FMV is based on the present value of likely future cash flows...and how that relates to debt service coverage. Can the cash flows of the business service the debt?

 

The marketplace can be finicky. Price could be volatile, variable, and subject to specific market conditions. It would be very difficult for a valuation analyst to give you a price. A business will often be "worth" different amounts to different potential buyers. But we can help you understand value. Over time, value and price are likely to be correlated.

 

But value and price are not the same thing. Nick read through my first draft, and immediately called me on the phone to remind me of the Warren Buffet quote: "Price is what you pay, value is what you get." Thank you, Nick.

 

If you're in the market for a valuation, do your best to hire an analyst that understands that they are talking to you about Value and not Price. Make sure they understand YOUR specific purpose and YOUR specific use. Understand that their role is not just to confirm your opinion, but also to share their own.