Many sellers of privately owned businesses overvalue their companies. This mistake is a major reason why businesses fail to sell. However, there are solid techniques and procedures that can be used to help both buyers and sellers calculate an appropriate value for any particular business. Above all, buyers and sellers should realize that valuation is art and science, which is one reason a seller’s valuation is often quite different from a buyer’s.
I recommend that my clients seek professional advice from an outside valuation firm or from M&A experts at an investment bank. The pros understand business-value drivers that are unique to sellers and buyers, the value of the business’ intellectual property, and how investment decisions are made by venture capital and private equity firms, and strategic and financial investors.
There are three generally accepted methods that should help sellers and buyers formulate a reasonable valuation. They are asset-based, income-based and market-based. Each can produce different valuations, so they should be used to triangulate a range, while still allowing for other factors that are unique to the business to boost or lower the final valuation.