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Quazar Quips© Volume 1, Issue 10

What to do with Conflicting Valuations

We provide a complimentary market analysis to any business owner who meets with us and is thinking about transitioning their business. Sometimes, our market analysis yields a value that is different than what a business owner has heard from other sources. For this month’s newsletter, we want to explore what to do with conflicting valuations and how values can differ so greatly from one source to the next. 
Business owners may hear values from many different sources, some informal and some more formalized. Some examples include: a friend on the golf course who knows someone who sold their business, a Financial Professional giving a value in a passing conversation, an official Business Valuation, or a Business Broker giving a market analysis. Oftentimes, the highest number heard is the value that we as business owners remember and are hoping to get for our business. 

However, the source of the value given is extremely important. A friend comparing one company’s sale to another likely isn’t privy to the industry or company-specific information necessary to give an accurate value. Even a Financial Professional, without doing the deep-dive required of an official Business Valuation, may not be the best source of information. Business Valuations can be a good data point in estimating true market value and are oftentimes good indicators of value (after all, that is exactly what they seek to do!). A market analysis from a Business Broker or Investment Banker is another good source of information in determining a business’ true market value, as professionals that are active in the marketplace typically have the knowledge (and know which questions to ask) to determine true market value. 

The method used to determine a company’s value is another factor to consider. For example, we seldom see companies in our space sell based off of a multiple of revenue; for transactions where money is borrowed to pay for a business, the buyer needs cash flow to repay the debt. Most commonly, a business’ sale price is based off a multiple of cash flow (please click here for our previous newsletter which explained  some common metrics used in valuing a business)

Ultimately, a business is worth what a buyer is willing to pay, so the market sets the price. The final selling price of a business can vary from what even reliable sources of information predict. But when faced with conflicting valuations, we strongly recommend giving the most weight to trained professionals who are active in the marketplace and understand current market conditions. Friends want to stay friends and paid advisers want to remain advisers; getting an opinion from an independent third party is important. So play golf with your friends and keep your advisers, but leave the market analysis or valuation to those with a deep understanding of the overall market, your industry, and your business. 

Thank you for reading Quazar Quips, a monthly newsletter discussing the Business Brokerage market for deals between $1 million and $5 million in value. Each month, Quazar Quips will keep you informed about statistics, trends, and helpful thoughts within the Business Brokerage deal space. Stay tuned for next month’s newsletter, where we will discuss “Typical SBA Loans.” If you or someone you know is thinking about selling their business, please contact Adam Webb at (763) 550-9555.
Bruce Behm is a licensed real estate broker of Quazar Business Brokerage
Quazar Business Brokerage©, 3535 Plymouth Boulevard, Suite 210, Minneapolis, MN  55447

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