Somewhere in my first conversation with a business owner, the topic will turn to the value of the business. I’m inevitably asked, “What do you think it’s worth?” I always reply with “I don’t know enough to value the business,” and I follow up with “What do you think it’s worth?”
After I hear the number, I respond with “I don’t know the value, but it’s most likely not that.”
I completely understand the owner’s desire to quickly know the value of their business. It’s often their most valuable asset and their primary source of income.
Driven by data in our high-speed AI world, a quick and free business valuation should easily be attainable. There are large elements of the planning and transactional advisory market that agree and are offering business owners a free valuation.
One trend I’ve noticed over the past year is the growing number of business owners who tell me they’ve already had their business valued. Sometimes the valuation came from a business broker or investment banker. Other times it came from their accountant, wealth advisor, or another trusted professional. Increasingly, this valuation is coming from an online platform offering a complimentary business appraisal.
A business appraisal can be a useful place to start. But it’s just that—a starting point. Business owners come to me thinking they have a valuation, but what they really have is an opinion.
A thoughtful assessment of a business involves far more than applying a multiple to EBITDA. It requires understanding the quality of earnings, customer concentration, recurring revenue, management depth, capital requirements, growth prospects, structure and the issues that are likely to surface during diligence. It also requires an understanding of which buyers are likely to find the business most attractive and why.
A great example of this is a company we worked with a few years ago. When we first met, they provided me with an appraisal completed by one of their advisors. It was a pretty package created by a software and it indicated a market value of the business at $3.5 million. We arrived at a value of $1.8M – $2.2M. When we went to market, all of the offers we received were within that range.
The point here isn’t to disparage the advisor’s valuation or to pat myself on the back for getting it right. It’s to recognize that valuation requires judgment about the market. Two experienced advisors can review the same company, apply many of the same inputs, and still arrive at different conclusions because they’re making different assumptions about risk, buyer demand, growth potential, and transaction structure.
Those assumptions matter. A company may support an attractive valuation range and still struggle to generate meaningful buyer interest. Another may receive a more modest valuation but create a highly competitive process because it aligns with the right buyer groups and has been positioned effectively.
There is nothing wrong with a complimentary business appraisal, as long as it’s viewed for the starting point it is. Owners should be cautious about building expectations around a number that isn’t supported by the judgment, analysis, and the market perspective required to withstand the scrutiny of an actual transaction. In a transaction, free can become really expensive.
When an owner asks me what their business is worth, they’re usually asking for a number. The better question is, ”How will the market value my business?” Those aren’t the same conversation. In the next note, I’ll talk more about why I believe valuation and marketability are inseparable.
