Valuation And Pricing

Not long ago I had the following initial conversation with a small business owner:

Owner: I had my business evaluated by a professional valuation expert. He told me my business was worth $2,500,000.

AHC: I understand. When we thoroughly reviewed your company, including financial results over several years, we also considered all market trends and recent sales for similar businesses in your area. I believe we can effectively market your company with an asking price of $1,600,000. We don’t have the data to support an asking price of $2,500,000, but I’ll be happy to review the data and related assumptions with you to see if there are other factors to consider that I may have missed.

Owner: But the valuation expert told me it was worth at least $2,500,000!

Actually, everyone is right, but there are clear differences in context. Valuation experts may consider many of the same factors as a merger & acquisition advisor in creating a valuation, but they are often relatively independent of current market trends, including very recent sales, depending on the marketplace and the date of the valuation. Valuation is also often used for legal (e.g. divorce) and financing (e.g., a loan) purposes that may or may not be pertinent to a current market-based transaction.

Pricing for the market is very focused on recent sales trends, along with all aspects of management and operations, financial results, and other valuation-related data. Pricing must also be sensitive to helping the seller attract reasonable buyer interest. The distinction between valuation and pricing is very important. Potential sellers who do not understand the difference may have developed expectations that can become barriers in a marketplace with experienced buyers who have their own seasoned expectations.