What Creates Business Value? Kinetic Value vs. Potential Value

While there are plenty of clichés around valuation – a business is worth only what someone will pay for it, for example – there is usually a gap between what a seller wants for his business and what the buyer is prepared to pay. What accounts for the gap … and how can it be filled?

Nate Nead explains it in the form of kinetic value and potential value and uses some examples from chemistry to make his point about “catalysts”.

Buyers and investors do not want to pay for something unless they have to. That is, rarely will direct value be placed on potential unless there is confidence in the catalyst to take potential value and turn it into kinetic value. We see a great deal of opportunities from people who believe their idea or asset is “the next Facebook,” “a billion-dollar company” or “a no-brainer investment.” What is the catalyst that will convert the potential into kinetic value? For some, it is more intellectual capital. For others, financial capital is required. For others, a great deal of hustle and sweat equity.

Every seller claims potential in the hope that the buyers will be more impressed by this possible future performance rather than historical performance, and use that expectation to guide their offer. However, Nate argues, such potential needs to be unlocked or converted from potential value to kinetic value.

The full article: What Creates Business Value? Kinetic Value vs. Potential Value