What is the difference between the value and the price of a company?

Similar to the market value of a company's economic assets, the value of a company, regardless of its size, is a transparent indicator estimated from the value of its capital and financial debt.  

The price of a business represents the total financial consideration paid by the buyer. 

The concepts of selling price and enterprise value can be difficult to reconcile.  

Understanding the differences between these two concepts provides a starting point for many negotiation situationss and transaction.  

What is the difference between the price and the value of a company?

Although the terms "enterprise value" and "enterprise price" may be confused, they do suggest some differences, especially when discussing actual market offerings. 

What is the price of a business?

The price of a business is a financial consideration, the cost that the buyer must pay to acquire it. This cost can obviously vary from one company to another. To define a real price, it is necessary to compare the company with the different offers present on the market.  

The price of a company is determined from the exchange between the seller and the buyer, while the value of a company can be defined without taking this notion of discussion or negotiation.  

Several factors can impact the price such as: 

• the urgency of the acquisition or sale; 
• the rarity of the case; 
• the objective of the transaction (to acquire more know-how, to overtake a competitor...); 
• the number of potential buyers. 

On the other hand, a transaction may not take place if the seller does not reach the minimum amount he expects to obtain from the transfer (psychological price).  

The financing to complete the transaction and the length of time to repay the bank also influence the price.  

Thus, the difference between the price and the enterprise value lies in the fact that the latter is based more on a mathematical and theoretical exercise that will be a starting point to enter into negotiations and obtain financing. 

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Why is the value of a company different from the price? 

Even if the value of a company is often comparable to the final price paid, it may happen that the latter is not representative of the valuation estimate. This difference can be explained by the fact that : 

• Buyers are unique: their knowledge, financial assets and negotiating skills may differ, however, even if their skills are the same. 
• Emotions can play a role in the decision-making process. 
• To add value to their existing business, some strategic buyers are willing to pay more than the theoretical value of the business. 
• The price of the company may not be entirely made up of cash (shares, indexation clause on future profits, etc.). 
• The determination of the enterprise price can also be influenced by the repayment period with the bank. 

Why have a company evaluated?

Regardless of the type of business, managers are often led to question the value of their company. This element is indeed essential in several situations, among which : 

• acquisition of a company ; 
• transfer of a company ; 
• an intention to merge between companies; 
• an opening of capital ; 
• the realization of a minority transfer between shareholders ; 
• the estimation and the balance sheet of an asset ; 
• fundraising; 
• be regularly informed about the company's performance and results; 
• to give a transparent vision of the company to the employees as well as to the team of employees; 
• prepare efficiently a recruitment or innovation phase following the exploitation of the added value; 
• resolve a dispute with the tax authorities; 
• legal restructuring;
• obtain an overview of the company's financial health;
• etc. 

Moreover, entrusting the business valuation process to a specialized firm is advantageous for establishing the trust of partners, employees, customers and investors and thus facilitating negotiations.  

What calculation methods are used to value a company? 

The valuation of a company at "fair value" (fair value of its market price) must be carried out at a moment T and be conditioned by the three elements that are : 

• regulatory developments (tax, administrative, accounting, etc.); 
• access to financing (trend of banks and lending institutions, etc.);  
• economic conditions (inflation, GDP growth, economic confidence index, stock market flows, etc.). 

The value of the company is thus generally calculated by adding the value of its equity and the value of its financial debt.  

If the company has no debt but has excess cash, the enterprise value must be calculated by subtracting this cash from the equity.  

Finally, capitalization is calculated by subtracting debts from the enterprise value.  

If there is no debt but a cash surplus, the value of the shares will correspond to the value of the company plus the cash.  

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Focus on the different methods of enterprise value assessment 

In order to calculate the value of a company, three methods can be used. These include the : 

• heritage ; 
• comparative ; 
• performance. 

The patrimonial method for the evaluation of companies 

A rigorous approach from an accounting point of view, the patrimonial method consists of obtaining a valuation result for the company by adding up everything it owns at the time (intangible assets, economic assets, financial assets and shareholdings, etc.) and subtracting from it the debts incurred.  

It is precisely this result that makes it possible to obtain the company's net assets without taking into account certain factors such as the company's growth potential. 

Determining the value of the company with the comparative method 

Generally used within the framework of a sale of company, this method consists in listing and being inspired by the prices practiced on the market of the same sector of activity with an aim of fixing a selling price.  

The performance method for a real vision of the enterprise value 

Summarized by dividing the company's earnings and its discount rate over several past years, the yield method relies on the company's real potential and its ability to generate profits to determine its value.   

Have the value of your business assessed:

XVAL.fr experts are at your disposal to help you in the valuation of your company, whether it is to sell the company, raise funds or negotiate financing.

In some cases, our expert consultants have managed to carry out studies that have enabled companies to reach a value of several tens of millions of euros.

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