Business Valuation Blog | Understanding Buying / Selling a Company

Why is business valuation vital to negotiating a business sale?

Posted by Business Valuation Specialists LLC on Jan 17, 2018 3:21:00 PM

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When you're in the process of negotiating a business sale, one tool stands out above all others whether you're the buyer or the seller: the business valuation. But why is it so important to the process and how does it protect both parties as the negotiations go forward? Here's a quick overview of what a business valuation is and what it can bring to the negotiating table.

Why is business valuation vital to negotiating a business sale?

Selling a business can seem like a fairly straightforward process. A buyer and seller connect, agree on a price and transfer ownership, right? However, it's not nearly that simple. How is that price determined? Did the seller simply look at recent sales of similar businesses in the area and use those prices? How do you know whether the asking price is fair or not? Is the buyer or seller being taken advantage of? These questions can plague those who are tied up in business sale negotiations.

Fortunately, there's an easy solution that keeps both sides happy during the negotiation process. A business valuation uses an independent third party who has had training in tested methodologies to calculate the business' overall worth. Because the appraiser is an independent party, they have no interest tied up in inflating or deflating the company's calculated value. This means that the value they calculate is much more likely to be favorably received by both parties in the negotiation process.

The appraiser is also able to use some amount of flexibility in the valuation, depending on the exact circumstances. They can create a valuation report focused on a quick sale, which may not net as much as the seller would like overall, but is often helpful when an estate needs to be settled and the heirs to the estate want a fast resolution to the process. If the seller is willing to wait for the right buyer, a higher value may be calculated to reflect that ideal circumstance.

But what about the buyer? With the independent approach of a certified business valuation specialist, the buyer knows they can have confidence that the calculated value is accurate. Because of the level of research used in the appraisal, the buyer can rest assured that there has been a solid investigation into the company's finances, the condition of the market, the industry's outlook and any special features of that business that can increase or decrease its value. 

For example, when a company has a reputation for innovative product development, the owner may inflate the asking price. But what if the owner's role in innovation is a vital part of that process? The new owner may not find as much value in the company when one of the major innovators is leaving with the sale. A business appraisal looks at these aspects and how the company will change with the sale. They can then take that into account and determine how much of an impact that will have on the overall value.

By getting a business valuation as a part of the process of negotiating a business sale, both sides realize significant benefits in the process. They can walk away from the negotiating table knowing that they've done a good job. The valuation process, when completed by a certified business appraiser, helps ensure that everyone is getting a fair deal. 

Topics: negotiating a business sale, Business Valuation