Why Business Value and Business Selling Prices May Not Always Be the Same
Nov 29 2016
Owners and buyers alike feel that it’s their right and responsibility to know exactly what a business is worth before signing any contracts or making any serious commitments.
However, the results of a business valuation and the eventual business selling prices can often differ. Just because you arrive at a certain figure using business valuation tools, that doesn’t necessarily mean it will sell for that exact price.
Yet time after time, business owners and buyers are surprised when the two numbers don’t match their expectations. The question of why a business owner would sell their company for more or less than what it’s truly worth is one that gets asked all the time.
Here’s one way to think of it: selling a business is actually the most accurate business valuation tool, as only the actual sale price can truly tell you what a business is worth.
And the truth is that business valuation tools are mostly economic analysis exercises. Unsurprisingly, a company’s financial information is essential to the process, but not the determining factor. For instance, to perform the most accurate business valuation services possible for a small business, it’s important to have three to five years’ worth of income statements and balance sheets available.
However, even with all of that information, the buyer and seller will ultimately have different goals in mind. After a business valuation report comes in, the negotiation process hasn’t necessarily even started yet.
In the vast majority of cases, the overall cash flow of a business must meet several requirements in order for any deal to make financial sense to all participating parties. Debt services on any bank loans is another reality that any buyer has to deal with. If a business isn’t at least breaking even, then they may understandably want to acquire the business at a lower price.
Despite the fact that some businesses aren’t breaking even according to small business valuations, some do sell for much higher than their calculated value.
This could be a result of many different factors, but the most likely cause is that the company is providing a uniquely necessary product or service to its customers (think about companies like Facebook).
There are a lot of things that go into determining a business’s value, and not all of them fit neatly into a spreadsheet. That being said, never underestimate the value of a quality spreadsheet and the best business valuation tools.