There are many reasons to get a business valuation, whether you’re preparing for a sale, planning succession, raising finance or resolving a shareholder dispute, the figure attached to your business can influence important commercial decisions. So, it can be surprising, and sometimes concerning, to receive two valuations that differ, despite both being based on the same business. But that doesn’t mean one of them is wrong.
Business valuation is both a science and an art. While there are recognised methodologies and financial calculations, professional judgement also plays an important role. Understanding why valuations can differ helps business owners interpret the results with greater confidence and make better-informed decisions.
A valuation is an informed opinion, not an exact science
Unlike valuing a publicly traded company, where the market determines the share price, privately owned businesses do not have a single definitive value. Instead, a valuation represents a professional opinion based on available financial information, market conditions and the purpose of the valuation itself.
Two experienced valuers can legitimately arrive at different conclusions if they interpret certain factors differently or apply different assumptions. That is why choosing the right business valuation adviser with the right experience is so important.
A valuer who understands your sector is far more likely to ask the right questions, recognise industry-specific risks and opportunities, and understand how buyers within that market typically assess value. Someone taking a more general approach may still produce a technically sound valuation, but they may overlook factors that are particularly important within your industry.
The numbers are only part of the picture
Many business owners assume a valuation is simply a mathematical calculation based on profit. Profitability certainly plays a significant role, particularly in the SME market where valuations are often based on a multiple of EBITDA or maintainable profits. However, deciding what multiple should be applied is rarely straightforward.
The appropriate multiple depends on a wide range of factors, including:
• The strength of the sector
• Growth prospects
• Risk profile
• Size of the business
• Recurring income
• Customer concentration
• The level of buyer demand within the market
For example, if a particular sector is attracting significant investment or acquisition activity, increased competition among buyers may naturally push valuations upwards. Conversely, if demand is weaker or uncertainty exists within the market, values may be more conservative.
Why the purpose of the valuation matters
One of the biggest influences on any valuation is why it is being carried out in the first place.
A valuation prepared to support the sale of a business may take a different perspective from one produced for a shareholder dispute or succession planning exercise.
For example, when preparing a business for sale, advisers will naturally consider what a willing buyer may be prepared to pay in an open market. Any eventual transaction is also likely to involve negotiation, so valuation discussions often reflect commercial realities surrounding the sales process.
Compare this with a shareholder dispute. In some businesses, shareholder agreements may restrict who shares can be sold to. If one shareholder must offer their shares to another existing shareholder before approaching an external buyer, the potential market becomes much smaller. A restricted marketplace can place downward pressure on value because there are fewer potential purchasers competing to buy the shares. The context matters just as much as the numbers.
Different businesses require different methodologies
There is no single valuation methodology that suits every business. While earnings multiples are commonly used for profitable trading businesses, they are not always the most appropriate approach.
An asset-rich property company, for example, may derive much of its value from the underlying property portfolio rather than its annual profits. In those circumstances, asset values become a much more significant part of the assessment.
An experienced valuer will often consider several recognised methodologies before determining which provides the most reliable reflection of value. Rather than relying on one calculation alone, the final opinion is frequently informed by a blend of approaches.
So, what if two valuations are very different?
Large differences between valuations should not automatically be viewed as evidence that one is incorrect. Instead, they should prompt further discussion.
Business owners should understand:
• Which methodology has been used
• What assumptions have been made
• Whether the valuer has relevant sector experience
• The purpose for which the valuation has been prepared
Understanding the reasoning behind the figure is often more valuable than focusing solely on the figure itself.
Building value starts long before a valuation
While business owners cannot control market conditions, they can influence many of the factors that contribute to business value.
For most SMEs, improving sustainable profitability remains one of the most effective ways to increase value over the medium to long term. Strong financial performance, efficient operations, robust systems and clear growth potential all contribute to making a business more attractive to future buyers or investors.
Rather than viewing valuation as something that only happens immediately before a sale, businesses should think about value creation as an ongoing process. Read our article on small business valuations as a tool for growth.
At Hayward Wright, we provide independent business valuation services to support business sales, succession planning, shareholder matters and strategic decision-making. Our experienced team combine valuation methodologies with sector knowledge to provide business owners with clear, commercially focused advice. Whether you’re planning years ahead or need a valuation for a specific purpose, we can help you understand what your business is worth and, more importantly, why.