We've heard so much about popular student-athletes inking deals with some of the largest sports brands, but did you know there's a difference between what the value of the deal is versus how much that athlete is paid out?
This month, we're tackling the difference between valuation and payout value.
When it comes to deals, there is often a difference between the valuation of a company or asset and the actual payout that is received by the parties involved. This difference can be significant and can have a big impact on the outcome of the deal.
What is Valuation? Valuation is the process of determining the worth (or value) of a company or asset based on a number of factors such as financial statements, market conditions, growth potential, trademark valuation, and more. Once the valuation is determined, it is then used as a basis for negotiations and determining the terms of a NIL deal, for example.
Here's an easier way of understanding it. If I represented you in a business deal around allowing a business to use your "name," (i.e. licensing deal), the asset is your name. What we'd have to determine is "What is the value of your name?" We'd look at any registered marks around your name, any products that have been sold using your name, the impact your name has in the current market, and whether your name has continued to grow in popularity bringing in more interest that will only yield additional payouts, and how much have you currently made on your name. That will be our standing basis for valuation and after knowing this number, we can be more confident in knowing where we stand in negotiations and avoiding undercutting (and undervaluing) your brand.
The Payout. One thing most athletes and millionaire entrepreneurs fail to understand is that although you have a high valuation, the actual payout will be different. This is true because other variables influence the final payout such as the following:
Negotiation: The actual payout may be lower than the valuation if one party is able to negotiate a better deal for themselves.
New and Unproved Concept: Your idea may be new and unproved meaning that there may not be much to compare it to, but it could be wildly successful. The problem is - investors may not want to take on a large risk so they may want to pay a lower payout regardless of what the market trends could be until it's proven.
Financing: The way the deal is financed can have a big impact on the actual payout. If a deal is financed through debt, the actual payout may be lower due to interest payments and other fees.
Market conditions: The market conditions at the time of the deal can also impact the actual payout. For example, if the market is in a downturn, the actual payout may be lower than the valuation.
Performance: The actual payout may be higher or lower than the valuation based on the performance of the company or asset after the deal is completed. For example, think about affiliate relationships. You're paid a percentage of deals that you sell. As such, the payout is wholly dependent on the affiliate selling a particular asset.
Timing: The timing of the deal can also impact the actual payout. If the deal is completed at the peak of the market, the actual payout may be higher than the valuation.
In conclusion, it's important to understand that there can be a difference between deal valuation and actual payout. While valuation is important for negotiations and determining the terms of the deal, the actual payout is what ultimately matters.
It's important to take into account all the factors that can influence the final payout when making decisions about a deal.
If you're struggling with understanding how to get your base valuation number for purposes of negotiating the best deal, then you should join the Annual NILCOMBINE. Register Now at https://bit.ly/NILCOMBINE2023