Meaning
Financial variances represent the gap between the internal worth an owner assigns to an asset and the price an external buyer offers. The subjective valuation spread measures the distance between a founder’s emotional attachment and the market reality. These variances prevent the closing of deals because the two parties are looking at two different sets of numbers.
Pricing Disparity
Buyers look at cash flows and comparable sales while sellers look at the years of effort and the potential for future growth. The subjective valuation spread is often largest in the technology sector where intangible assets are hard to price. It costs the firm the chance to exit when the market is at its peak.
This gap is a measure of optimism against the record of the industry.
Sentiment Premium
Premium costs are often added to the price by a founder who is not ready to leave the company. The subjective valuation spread acts as a defensive buffer against a loss of identity. It ensures that only an offer far above market value will be accepted.
Market Friction
Friction occurs when the spread is too wide for any compromise to be reached. The subjective valuation spread is the primary reason for the failure of secondary share sales.
