Business valuation: more art than science

  • by Sam Lewis 26 May 11

Interview with...

Ken Ducey, MD and business broker, Princeton Capital LCC
Topics covered:
Why business valuation is more of an art than a science, how buyers generate a wide range of values from the same business, and why a broker can help you achieve an extra 20% on your selling price
CV:
Experienced business broker working with companies under $50m in revenue to find strategic buyers and help them with their exit strategies
Expertise:
Firm offers mergers and acquisitions, valuation, deal negotiation, buyer search, and targeted marketing advisory services 
Location:
Ridgefield, Connecticut
Small business for sale

Ken Ducey on why valuing a small-business for sale is so difficult...

Valuing a business is without a doubt one of the trickiest things in the business community. There are so many different ways to value a business. Unfortunately it’s a more art than science in many ways. 

The other important factor is that there are never two different businesses that are alike. In terms of most commodity items out there, whether it be a car or a property, at least there is some sort of comparable – you can say “this is what we could value this car at, based upon the fact that it has cruise control, whereas this one doesn’t.”

When you talk about a business they are so wide-ranging in terms of customer concentration, consistency of revenue... so it’s very difficult to put a price on it. 

But what it really comes down to is: what risk is there for a potential buyer in that business? And obviously the less risk there is, the greater the value of that business to that buyer, and vice versa.

I could get 10 ‘experienced’ buyers in a room and present them with the same business, and they would typically come up with a very wide range of values

When a buyer looks at a business he asks what he or she can predict and what assurances he or she can get that the revenue and profits are going to happen over the next 3, 5 and 10 years.

On the importance of appointing a broker...

It’s not the brokers, either; it’s the buyers. I could get 10 ‘experienced’ buyers in a room and present them with the same business, and they would typically come up with a very wide range of values. 

You have to remember that when it’s a 10% difference – and let’s say business is going for $2m-$5m – and it’s a closely held company, you’re talking about a huge range in terms of what the person or entity will receive. Ten to 20% of $5m – that could be up to $1m. 

That’s a very big difference, so that’s why you do want to get an intermediary. And we believe we are good at finding a buyer who is going to value it 20% higher.