One will sometimes hear a business owner say, "Everything is for sale. If you get my price, I'll sell the business". What that owner is really saying is "If you get me twice the value of my business, I will sell it". The idea, implicit in this concept is that there is a difference between value and price, and there is.

In any company, business value is largely driven by the in-place fair market value of the tangible assets and the ability of the generated cashflow to support those assets. To the extent that cashflow exceeds that requirement, the surplus is called "excess earnings." Those excess earnings, if they are sustainable over time, have a value of their own. This value is called "Intangible Business Value" or as we often hear "Goodwill". Goodwill is simply the economic value of a stream of cashflow in excess of what the investment would earn if invested in a risk free form.

Without knowing the value of the tangible assets, the working capital necessary to run the business and the normalized operating earnings or cashflow, one cannot arrive at a "fair market value" of a business. However, once this information is known, a competent business valuator can arrive at a fair market value conclusion. This conclusion must be measured against a number of other criteria. The most important of these is the question of reasonableness. Will the business produce sufficient cashflow to permit the buyer to pay off the acquisition debt over a reasonable time frame and will it provide a fair return on investment? Is the cashflow sustainable after acquisition? Is the value greater than the cost of replacement? Is it consistent with similar transactions in the same industry?

A value conclusion reached using the assets and cashflow of a business is called a conventional value. That is to say that a business so priced will have appeal in the conventional market. In such a case, the "value" and the "price" will be the same or very nearly the same.

Value and price are not as nearly synonymous as one would think. If there are no buyers in the market who want to buy a particular business, then the price obtainable for that business will likely be lower than the value. Conversely, if several potential buyers are bidding on a business, the price very frequently is higher than the value

In summary, assets and cashflow determine value. Buyers determine price.

There are situations where a seller can obtain a price for a business which is substantially above its fair market value. This is when there are synergistic buyers who can acquire and sustain the sellers' cashflow without the seller's overhead or a portion of that overhead. When such a transaction takes place, the whole (the new merged entity) becomes greater than the sum of the parts (the total of the pre-merged companies).

While on occasion there can be a drastic difference between value and price, it is important to understand that buyers, circumstance and market conditions create these situations. It is important to realize that these are exceptions. In nearly all cases, common sense prevails and buyers and sellers ultimately understand that assets and cashflow are the key elements of the business being sold. Attempting to sell above the value, or attempting to acquire below the value seldom yields a successful outcome