Valuation isn’t the same as price

A business valuation should set an expectation for price. The price is what a buyer will actually pay. Those are two different things — and confusing them is one of the most common and costly mistakes an owner can make.

There’s no shortage of people ready to give you an “authoritative” opinion on what your business is worth, and very few of them agree. So when someone hands you a number, don’t just accept it — ask a simple, powerful question: “Why that much?” (or, if it seems low, “Why so little?”). Don’t be fobbed off with vague talk of “history”, “reputation”, “goodwill” or “the balance sheet”. Real value is driven by competition, operational synergies, technological change and how well your business fits the buyer. Anyone giving you a valuation should be able to explain their assumptions and the context clearly. If they can’t — show them out.

One warning worth repeating from the book: a flattering valuation is sometimes used as bait. The broker tells you your business is worth more than you’d hoped and, at the exact moment your confidence is highest, the upfront fee appears. Don’t be seduced by a number that doesn’t make sense to you — if it sounds too good to be true, it probably is.

The guiding principle: use value to get a price. Ask too high a price, and it won’t sell.

For the full chapter on valuation, download our free guide — or talk to us for a straight answer on your own business.