Most owners have a number in mind for what their business is worth. Often it comes from a conversation at an industry event, a multiple a friend got, or what the owner needs to retire. Buyers start from a different place. They look at the financials, the risks and the market, and they build their own number.
A formal valuation before a sale closes that gap. It shows you what the business is likely worth, why, and what you can do to improve the result before a buyer starts asking questions.
Valuation professionals generally consider three approaches and weigh them based on the business and the purpose of the valuation.
Values the business on the cash flow it is expected to generate in the future, adjusted for risk. This is often the primary approach for profitable, established companies, because buyers are ultimately paying for future earnings.
Compares the business with sales of similar companies or with publicly traded peers. This approach shows what the market has actually paid, but it depends on finding comparable transactions.
Values the business on the fair value of its assets minus its liabilities. This approach is most relevant for asset-heavy companies, holding companies or businesses that are not generating strong earnings.
A sound valuation explains which approaches were used, how they were weighted and why.
Buyers and their advisors will pressure-test your numbers. A valuation helps you see the business the way they will. Common areas of focus include:
Each issue a buyer finds becomes a negotiating point, and usually a reason to lower the price or add conditions to the deal.
The best time for a valuation is two to three years before a planned sale, not two months before. That window gives you time to act on what the valuation shows:
Owners who wait until a buyer is at the table lose that time. They negotiate from the buyer's analysis instead of their own.
Not every situation needs the same level of work. A calculation of value is a more limited engagement that can give an owner a reasonable range for early planning. A conclusion of value is a full valuation with the analysis and documentation needed for a transaction, a dispute or a formal plan.
Our Know Your Number video series explains the difference in about a minute each:
Based in Greater Philadelphia, our valuation team works with owners of closely held businesses across the region and beyond to understand what their business is worth and what drives that value. We help whether you are planning a sale in a few years or need a defensible value now.
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It depends on the scope and how quickly records are available. A calculation of value typically takes less time than a full conclusion of value.
No. A valuation is an independent estimate of value based on defined standards. A listing price is a negotiating position, and the final sale price depends on the buyer, the deal terms and market conditions.
Often, yes. A valuation done years ahead gives you a baseline and a road map for increasing value before you go to market.