I am pretty certain that if you asked 5 people for their definition of value, you will get 5 different answers. The reason, value means something different to each and every one of us. What is important however is to know what value means to you! If you are a small business owner, your concept of value will be different than the major corporation. If you are a manufacturer of specialty nuts and bolts your concept will be different than if you were a dentist. Value is based on your reference point. It is also based on the purpose for finding it.
Value by Warren Buffet
Warren Buffett, recognized as being one of the best value investors in the 20th and 21st century, is often sought out for his opinion on value. In his letter to the shareholders of Berkshire Hathaway Inc in 2008, he stated that:
“Long ago, Ben Graham taught me that ‘Price is what you pay; value is what you get.’ Whether we’re talking about socks or stocks, I like buying quality merchandise when it is marked down.” (Warren E. Buffett, Chairman of the Board, Berkshire Hathaway Inc. 2008 Letter to Shareholders, p.5)
In a collections of Buffetts letters called “The Essays of Warren Buffett : Lessons for Corporate America” Lawrence Cunningham reports Buffett as writing:
Intrinsic value can be defined simply: It is the discounted value of the cash that can be taken out of a business during its remaining life. The calculation of intrinsic value, though, is not so simple. As our definition suggests, intrinsic value is an estimate rather than a precise figure, and it is additionally an estimate that must be changed if interest rates move or forecasts of future cash flows are revised. (The Essays of Warren Buffett : Lessons for Corporate America (2001), p. 200)
My View on Value
My definition of value from a business owner’s perspective is simple: Value is what my business is worth and the price is what an investor is willing to pay to get it. The higher my value, the higher the price an investor will pay.
Value is the function of two key components: Risk and Cash Flow. These two components are dependent on each other. For example, if you change the risk in your business, the cash flow is likely going change. Likewise, if you do something to change your cash flow, chances are the risk in your business has also changed.
Your View on Value
The first step to increasing your own business value, and to ensure you get the highest price for it is to know what value means to you.
Start with answering these three questions:
- What is your view of value?
- How would you define it?
- How would you measure your own business value?
Answering these three questions will give you a foundation for increasing your business value. Knowing what it is you are trying to increase, why you want to increase it and what you need to change to increase it is the first step in “How to Increase Your Business Value”.
Copyright 2012. Bruce Everitt. All rights reserved.
Bruce Everitt, a CFA® charterholder, is the Principal of Willo Consulting Group, and specializes in increasing business value for small and medium businesses around the world. www.willoconsulting.com
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