SELLERS VS. BUYERS
Sellers often feel that buyers or appraisers undervalue the business because the buyer doesn’t understand the business model, or because the valuation methods fail to take into account unique qualities of the business.
THE IMPORTANCE OF ACCURATE FINANCIAL RECORDS
While it is true that different valuation methods may result in different values for the same business, one thing that can’t be overstated is the need to have accurate financial records. Most company financial statements contain errors, so it pays to go through them well before any potential sale to ensure that your numbers will hold up to the rigors of an audit or other intense scrutiny during due diligence.
DIFFERING VIEWS OF THE BUSINESS
In addition to potentially inaccurate financial statements, another reason for differing perceptions of value is how the buyer and seller view the business. Sellers would do well to consider valuing the company from two perspectives: that of a financial buyer, who is evaluating the business as a stand-alone investment with no anticipated synergies, and that of a strategic buyer who may see additional value due to synergies such as acquiring a competitor’s customer base.
DETERMINING A REALISTIC VALUATION
In each case, a realistic valuation of a company should be determined early on. The seller should have made decisions about the asking price and terms, the expected price and terms, and the walk away price and terms. These decisions should be made before getting caught-up in “deal fever.”