Who Should Not Value Your Business

Exiting a business is a high stakes endeavor to monetize what is likely a family’s largest asset.  Many options for valuation exist, but note that valuation for potential sale is dramatically simpler than valuing the equity in a company or the value of company shares. 

Besides valuing for a sale, shares of the company may need to be valued to exit an investor. These valuations require analysis of the company governing documents, capital structure and strength of ownership, making them more complex than the M&A appraisal.

So, the first caution is to make sure a business valuer knows the difference between these valuation types. Many don't.

"Beware of agents and business brokers that have a vested interest in listing your business with them, as this is how they make their money. Since they get paid primarily upon sale, any sale is better than no sale."  - Attributed to Forbes Magazine

Business Brokers and M&A Specialists

The basic issue is whether the agent and owner interests are aligned.  Brokers may float high values in order to secure the selling contract, and then not achieve them. Or business brokers may undervalue your business in order to obtain a high number inquiries. In either case, the owner goes into a deal negotiation unarmed as to what the business is actually worth.   

A corporate M&A specialist searches for acquisitions on behalf of a client.  If they can deliver multiple opportunities for the same kind of business to their client, then the specialist works the deal price lower. In robust markets under-pricing is not much of an issue, if the broker has properly marketed the business and delivers multiple offers. Price will rise to market because the competitive bidding process maximizes value.  A single offer situation is risky.

Estimates of business value are tainted by a broker's bias, but for M&A they are expected to be reasonable. However, because of the complexities involved with holding the company under current ownership, a broker estimate is not a sound way to understand value for estate planning purposes. Accountant or CPA

Accountant-produced valuation reports are often simply calculations because calculating taxes from historical facts is their day job. 

Compared to a full valuation, a simple calculation may be useful but unless the appraiser is diligent in selecting the right data and applying the right benchmarks, it may be way off.  While the math in a CPA generated business appraisal is almost certainly correct, the models selected may not be best, the data used are unlikely to match the actual M&A market, and the report is likely to be backward-looking when a forward look is the correct perspective. Ask where the data comes form. If the report applies public market data to a private company, chances are high of an inaccurate result.

​AI, Online Valuations and Industry Peer Data​

Applying an EBITDA or DE multiple to earnings is going to be the method used to sell a business, and it is a good indicator of value. 

One issue that causes error for the DIYer is getting adjusted EBITDA or DE correct.  Every good valuation adjusts the subject company's cash flow to a sustainable, ongoing cash flow that a buyer will acquire. Then a second error arises on the data side. Has the transaction data been similarly reviewed and adjusted, or simply taken at face value. If M&A transactions are not corrected to buyer cash flows and the proper asset configuration, the result will not be accurate.

Artificial intelligence applies historical public market data, for the most part. The data is an amalgamation of many factors, including size, non-operating assets, capital structure, sentiment and more. The AI result is an average company in an average market - an average public company - which is quite different than your specific privately owned company. This is an apples-to-oranges situation.

Online valuation tools won’t disclose how they calculate value, and it is almost certain the data used by the program is not being adjusted for irregularities.  It is the same problem encountered by the DIYer. Even if the company data is adjusted, mismatching on the transaction data will result in a number that may be off by 50% or more.

Valuation Specialists

Unfortunately, a valuation specialist may not produce good reports.  Cash flow mistakes and poor modeling are more common than might be expected. Because of poor reports, the IRS is working to increase penalties and disqualify poor appraisers effective in 2026.

A good valuation follows scientific principles and many practitioners simply do not have a satisfactory understanding of fundamentals, or use scientific methods.  Instead they may be imitating without understanding, relying upon tribal industry knowledge or applying statistics to historical data. 

As the IRS knows, a valuation credential is good, but not sufficient to know whether the appraiser is competent. So, a referral or review of a sample report helps separate the good appraisers from the bad ones.  Also ask how the company participates in the valuation industry. A well connected valuer is likely to be competent and get proper help when needed.

Speak with a Valuation Specialist

Ready to receive a reliable valuation of your business? SB Valuations uses a proven, scientific method that is so dependable that it withstands challenges of the IRS, litigation and investor negotiations. Speak with a specialist today.