Is a Business Valuation Always Right?

For many business owners, performing a Business Valuation feels like a moment of truth. After years of building a company—investing time, money, and energy—you finally get a number that tells you what it’s all worth for a business exit. Whether you’re thinking about planning a business exit, currently selling, bringing on a partner, planning for succession, or just curious, that number can carry a lot of weight.  And, if not done properly, it can be widely off the mark.

Here’s the reality: a Business Valuation is not always “right.” It’s not a fixed truth or a long-term guarantee. It’s an estimate—one that depends on assumptions, methods, timing, and context. Working with the right advisor and understanding the methodology used can help you use a valuation more effectively and maximize your ultimate outcome.

What is a Business Valuation?

At its core, a Business Valuation is an informed opinion, generated by an independent third party at a specific point in time based on comparative metrics in the industry.  It sets the expectation of what is possible as well as what is not.  Having it done properly can carry a great deal of weight with the market, buyers and banks.  The counter can be said if done haphazardly or by “a friend who is good with numbers”. 

A proper Business Valuation within exit strategy planning is typically prepared by a professional using established methodologies.  These often include income-based approaches, market-based approaches, and asset-based approaches. Each method can produce a different result, and none of them is inherently correct on its own.  The best valuations typically use a weighted average blend of at least 2 of the 3.

What is the scope of a Business Valuation?

In performing a proper Business Valuation, you are looking at how a business performs, and is expected to perform, over a period of time.  This is typically the previous 3 years, the current year and a forecast for the next 3.  It considers revenues, gross profit and net income.  Adjustments are then made to “normalize” the numbers to show what the business would be expected to do for a new owner.  This includes:

• Removing depreciation, amortization and interest paid by the business to obtain a base EBITDA number.
• Identifying and “adding back” any expenses in the business that benefit ownership but are not needed by a new owner.  Example, if an owner’s spouse works part-time in the business but is paid a full-time salary, the “non-working” portion of the salary is added back, thereby increasing profitability.
• Capturing one-time, non- recurring, expenses incurred by the business such as a legal settlement or employee retirement bonus.
• Notating any events (good or bad) in the business that skew the numbers and are not expected to continue.

Many valuations depend heavily on the earnings of the business and what they would be expected to provide for a new owner.  But there are other factors that can affect the value of the business.  These can include:

• Inconsistent results where revenues, gross profits or net income fluctuate widely between years.  This makes it very hard to establish a core baseline of what the business is expected to do on a go forward basis.
• The “hockey stick” effect where the business has performed consistently in the past but the owner is stating that it will grow dramatically over the next few years. Professional advisors and valuation firms – and  more importantly, an investor – may discount the probability of this occurring (as it has not happened yet), without some form of “proof” such as signed long term contract for a new customer, etc.
• Economic conditions such as interest rates, industry trends and factors such as supply chain availability or tariffs can affect how the numbers are viewed at a specific point in time.
• High customer concentration, where a significant portion of the revenue is tied to a single or few customers.  While the overall value may still be correct, the “deal terms” may reflect this risk where a portion of the sale price is held back and then released as the key customers continue to do business with the company.

How to ensure the most accurate Business Valuation

• Get professional help – Having a professional M&A Advisor can help you maximize the value of your business in your business exit while helping you avoid some of the most common mistakes.  Ensuring that the advisor uses an independent, accredited, third-party valuation firm is key.  These firms have access to market information that is not readily available that is used to determine the fair market value.
• Start early – Do not wait until you are ready to exit the business to have your first valuation done.  A good approach is to start 3 – 5 years out to establish a base value.  Once you have this and have identified the ultimate number you are looking for in your business exit planning, you can reverse engineer how to get there.  A good advisor can help with this by identifying the key drivers that affect the value in your specific business.
• Minimize risk – Again, getting the right advice is key.  Working with the right advisor with help you identify those areas that detract from the value of your business.  These include items mentioned previously such as customer concentration as well as non-financial items viewed as risky by a buyer such as high turnover, weak management staff, poor accounting practices as well as others.  If you are planning far enough out, you will have time to address these issues.
• Financial consistency- Besides consistent revenues and profitability, having consistency in the numbers of the business makes it easier for a valuation firm, as well as a potential buyer, to quickly validate the integrity of the financials. Consistent coding of expenses, revenue recognition and Balance Sheet management are all examples.

Is a Business Valuation always right?  In a word – NO.  However, as outlined in this article, there are many ways to maximize the value of a business, minimize risk and work towards the best possible outcome.  Obtaining the best professional advice and allotting the proper amount of time is the best place to start.