How to Determine the Best Method for Estimating the Value of your Business
What is a Valuation?
A business valuation is a formal and comprehensive process of estimating the economic worth of a business. It involves analyzing various factors such as financial statements, market conditions, industry trends, growth potential, and risk factors. A valuation is usually performed by a certified appraiser or a valuation expert who follows certain standards and methodologies.
A valuation is typically required for large public or privately held businesses or those with significant assets. Valuations are a must and the specified reason must be understood (e.g., tax, estate, or succession planning purposes, selling to a third party or partner).
What is a Sales Price Analysis?
A sales price analysis, also known as a broker’s opinion of value or a most probable selling price, is a less formal and less costly method of estimating the value of a business or an asset. It involves comparing the business or the asset with similar ones that have been sold or are for sale in the market, and adjusting for differences in size, location, condition, and performance. A sales price analysis is usually performed by a business broker or a market analyst who has access to relevant data and experience in the industry.
A sales price analysis is more suitable for smaller privately held businesses that are looking to sell a business in the near future. A sales price analysis can help them to determine a realistic and competitive price range that reflects the current market conditions and the expectations of different types of potential buyers.
Advantages of Sales Price Analysis Over Valuation for Small Businesses: Speed, Flexibility, and Price
There are several reasons why a sales price analysis may be preferable to a valuation for smaller privately held businesses, such as:
- A sales price analysis is faster and cheaper than a valuation, as it requires less data, analysis, and documentation.
- A sales price analysis is more flexible and adaptable to changing market conditions, as it can be updated more frequently and easily.
- A sales price analysis is more relevant and realistic than a valuation, as it reflects the actual prices that buyers are willing to pay for similar businesses in the market.
- A sales price analysis is more aligned with the goals and motivations of the sellers, as it helps understand the likely value and identify areas of improvement IF the likely price does not meet expectations and there is time to ‘fix’ or work on the business.
Therefore, a sales price analysis is often a more practical and effective way of estimating the value of a smaller privately held business than a valuation.