Price Versus Value When Buying a Business

Price Versus Value When Buying a Business
Written by Bobby Jan for Gaebler Ventures

If you are an entrepreneur and looking to buy a business, there are a few concepts worth understanding. This article covers the concepts of price, value, and cost.

Wondering how to value a business?
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Warren Buffett once said, "Price is what you pay, value is what you get."

Business valuation is difficult and too many people use price as the signal for value. The price for value confusion can be costly.

Price is the amount of currency paid to acquire an asset. Cost is the total amount of one or more commodity to acquire an asset.

These commodities could be anything from time, natural resources, currency, etc. Cost and price are closely related and are often interchangeable. However, in many cases, the price paid for an asset and the cost of acquiring it might be significantly different.

Without getting philosophical, value is the intrinsic economic worth of an asset. Value refers to the true worth of an asset as according to some standard. For example, you an asset's value might be how much it can produce another product.

Often, the value of an asset is ultimately how much it contributes to the bottom line of a business. The goal of business valuation is to determine the value of a business.

Paying attention to price instead of value caused many personal and social tragedies in history. Investing based on price is responsible for the Tulip Mania in the 17th century, the Great Depression in early 20th century, and most recently the dot.com bubble in the late 1990s

On the other hand, buying based on value has made many individuals very wealth, including the richest man in the world, Warren Buffett.

Cheng Ming (Bobby) Jan is an Economics major at the University of Chicago who has a strong interest in entrepreneurship and investing.