Buying or selling a business: check the value before the price

For sellers: test expectations before going to market

An early valuation can identify whether the expected price is consistent with supportable earnings and risk. It can also expose record gaps, unusual adjustments, customer concentration or owner dependence that a buyer is likely to challenge.

That does not mean every issue must be fixed before sale. It means the seller and advisers can decide how to present the business, what evidence to prepare and where expectations may need to change.

For buyers: understand what the price assumes

A buyer-side valuation can test the earnings base, proposed add-backs, selected multiple and risks before an offer is made or finalised. It should make clear which information has been supplied and which assumptions remain unverified.

The price may imply a view about future growth, customer retention, staffing, required owner effort or capital expenditure. Making those assumptions visible helps the buyer decide what further investigation or protection may be needed.

Price is only one part of the transaction

Two offers with the same headline amount can have different economic value and risk. The analysis may need to consider:

• Whether stock, working capital, cash or debt is included
• Upfront payment compared with earn-outs or deferred consideration
• Vendor finance, security and repayment terms
• Working capital required immediately after completion
• Owner transition support, restraints and key employee retention
• Capital expenditure or repairs needed soon after purchase

Two $1 million offers can be very different

Suppose Offer A pays $1 million at completion. Offer B pays $700,000 at completion and up to $300,000 after two years if agreed profit targets are met. Both may be described as a $1 million offer, but the second includes delayed and uncertain proceeds.

For Offer B, the seller needs to understand who controls the business during those two years, how profit is measured and what happens if the buyer changes prices, staffing or accounting policies. The buyer needs a workable payment arrangement and a clear measure of what it is paying for. These are matters for negotiation and legal drafting, not details to settle after the headline price.

Compare cash at completion, conditional payments, debt and working capital on the same basis before comparing offers.

Five questions to take into the first serious discussion

The answers help identify whether the apparent price disagreement is really an information gap.

• Which earnings figure is the price based on, and what adjustments have been made?
• What duties does the current owner perform, and who will perform them after completion?
• What assets, stock, cash, debt and liabilities are included or excluded?
• Which customers, licences, leases and supplier arrangements need consent to transfer?
• How much cash will the buyer need in addition to the purchase price to operate from day one?

Valuation is not due diligence

A valuation estimates value for an agreed purpose using defined information and assumptions. Due diligence investigates the business and transaction more broadly, including financial, legal, tax, commercial, operational and technology matters as relevant.

The two processes can inform each other, but one does not automatically replace the other. Buyers and sellers should obtain advice appropriate to the transaction and intended reliance.

When to commission the work

For a seller, the best time is often before pricing becomes public or negotiations harden. For a buyer, an early sense-check can help frame an offer, while a fuller report may be appropriate once adequate information is available.

If a lender, lawyer, court, tax adviser or another third party will rely on the work, confirm their scope and credential requirements before commissioning the report.