Business valuations vary because the purpose, date, basis, methods and assumptions may differ, as may the rights attached to the interest valued. Compare those inputs and the supporting evidence before deciding whether two estimates genuinely conflict.
By Tony Vaughan · Published · Last reviewed
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One of the things that business owners notice when considering the sale of their business is that there doesn’t seem to be any consistency when it comes to valuing a business…
One company will value your business as X and another Y. In this article we will be answering: Who values a business? How is a business valued? and why business valuations vary so much.
Who values a business?
How business value is built up
Multiples vary by sector, size and risk; a realistic view comes from evidence, not rules of thumb.
The valuation process is usually conducted by a professional with accounting, business or other industry knowledge and experience, normally instructed by a buyer or the business owner.
How is business valued?
Business valuation estimates the value of a defined interest on a specified date and basis. Methods may draw on assets, sustainable earnings, cash flows or comparable market evidence.
- How much are the assets (tangibles) worth?
- How much is the goodwill (intangibles) worth?
- Future or forecast growth and opportunity.
Some elements are straight forward to value, others are not.
Why do business valuations vary?
Valuation involves professional judgement, but conclusions should be supported by evidence. Differences can arise from valuation purpose, date, basis, inputs and the rights being valued.
Businesses differ, but comparable market evidence can still be useful with appropriate adjustments. Independent valuers can assess strategic benefits where relevant; the valuation basis governs the treatment of buyer-specific synergies.
For example, the same business may have different values as a going concern and in an orderly liquidation. A specific buyer may also expect synergies unavailable to others. Comparing estimates requires understanding these differing assumptions rather than treating every figure as the same measure.
Ultimately while business valuations will always vary, it is still worth considering the process to help better understand your likely business value range. In addition, the process of an independent business review may also help highlight business strengths and weaknesses, furthermore, you can start to benchmark your company’s growth and start to lay the foundations for your exit plan.
Research the market and consider suitable buyers as part of a planned sale. A valuation informs decisions, while preparation, buyer interest, due diligence and agreed terms all influence whether a transaction completes.
Common questions
What should I compare first when two business valuations differ?
Check that they value the same interest on the same date and basis. Then compare earnings adjustments, forecasts, risk assumptions and the treatment of cash and debt.
Can both an income valuation and an asset valuation be reasonable?
Yes, but their relevance depends on the business and valuation purpose. A trading business and an asset-holding company may require different emphasis.
Why can a strategic buyer’s estimate differ from market value?
A particular buyer may expect benefits unavailable to other purchasers. The valuation basis determines whether such buyer-specific benefits are included.
When should I update an older business valuation rather than reuse it?
Reconsider it when trading, financing, market conditions, ownership rights or the purpose have materially changed. A valuation reflects its effective date, not all future conditions.
Sources
General information from our archive, not personal advice.
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