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December 11, 2018

“Value” versus “Price”

Rick Norland

Rick Norland
Owner/Thorington Corporation

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From the perspective of a professional business valuator, there is an important distinction between “value” and “price.”  The sale of shares to an Angel or venture capital investor seldom reflects “value” and normally reflects “price.” 

The official definition of Fair Market Value is “the highest price available in an open and unrestricted market between informed and prudent parties, acting at arm’s length, and under no compulsion to act, expressed in terms of money or money’s worth.”

The official definition of Price is “the consideration paid in a negotiated open market transaction involving the purchase and sale of an asset.”

More casually, “value” is what something is worth and “price” is what you get for it.  Here are some of the reasons why the two results may be materially different:

  • Fair Market Value is calculated in a “notional” market, while Price reflects the real world;
  • Fair Market Value assumes equal negotiating ability between the parties, while Price is affected by different negotiating strengths;
  • Fair Market Value assumes both parties have equal knowledge, while Price reflects differences in information or assumptions;
  • Fair Market Value assumes there are no “special purchasers”, while Price may reflect the influence of a purchaser that has a unique incentive;
  • Fair Market Value assumes neither party is under compulsion to transact while, in reality, vendors are usually under some financial pressure to sell, and one or both parties are acting on emotion; and,
  • Fair Market Value assumes there are many buyers in the “national market”, whereas in reality there are often only a few that often confer.

Notwithstanding this important distinction between “value” and “price,” most discussions on the topic inherently use the term “value” to refer to “price.”  This whitepaper will follow that same practice.  Just remember though, all discussions on value really refer to price – i.e. what you can get for your company, not what it is worth.

This is a particularly important distinction when discussing “valuations” for Seed Stage and Early Stage companies.  With the higher risks inherent with these earlier stage companies, the valuation methodologies are much more subjective than the methodologies used for Later Stage companies.

Comments? You can contact me directly via my AdvisoryCloud profile.

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