Business valuation mistakes are among the most expensive errors in any sale. A price that is too high can leave a buyer struggling to repay a loan, and a price that is too low can cost a seller years of earned value. Knowing the most common mistakes helps both sides negotiate with more confidence.
Relying on a rule of thumb
Many owners hear that businesses in their industry sell for a certain multiple of earnings or revenue, and they treat that number as a fact. Rules of thumb can be a starting point, but they ignore the features that make one business worth more or less than another, such as customer concentration, growth, and owner dependence.
Use any rule of thumb only to check whether a more detailed valuation is reasonable, not to replace it.
Business valuation mistakes with unreliable financials
A valuation is only as good as the numbers behind it. Tax returns often understate earnings because owners reduce taxable profit, while informal books may overstate them by leaving out costs. Both can mislead a buyer or seller.
Ask an accountant to prepare an adjusted view of earnings that normalizes the owner’s pay, removes one-time items, and reconciles the statements to tax returns and bank records. Our guide to how to value a business before you buy explains the common methods and terms.
Business valuation mistakes caused by owner dependence
If the business cannot run without its owner, a buyer is buying a job, and the price should reflect that. Sellers often overlook how much of the revenue depends on personal relationships, and buyers sometimes underestimate how long it will take to replace the owner’s role.
Ideas from the Built to Sell book and the E-Myth Revisited show how systems and documentation can raise value by making a business easier to transfer.
Overlooking risk and concentration
Two businesses with identical profits can have very different values if one depends on a single customer, supplier, or employee. Buyers should ask what happens if the largest customer leaves, and sellers should address those risks before listing.
For businesses that depend on a supplier contract, such as a distributorship, the length and terms of the agreement can matter as much as earnings. See our guide to how to value a distributorship for details.
Forgetting assets, inventory, and working capital
The price of the business does not always include inventory, equipment, real estate, or the cash needed to operate. Disputes often arise because the parties assumed different things. Define what is included, how inventory will be counted, and how the business will be funded at closing, and read about the working capital adjustment for one common solution.
Letting emotion drive the number
Sellers may attach a price to years of effort, and buyers may fall in love with a business and rationalize a high price. Both are human, and both can lead to poor decisions. Build in time to review the deal with an advisor who has no stake in the outcome.
If emotions around a sale feel overwhelming, our article on the emotions of selling a business offers perspective.
Skipping professional help
A broker, accountant, or valuation professional can bring experience and comparable sales data. Fees vary, so read about the business broker commission and compare options before you hire. A good advisor often pays for themselves by preventing a costly error.
A simple way to avoid business valuation mistakes
Gather verified financial records, adjust them with an accountant, consider several valuation methods, and compare the result with real sales of similar businesses. Test the price under conservative assumptions, and keep detailed notes of how you reached it. Following these steps helps you avoid the business valuation mistakes that cause so many deals to fall apart.
More guidance on avoiding business valuation mistakes
- Letter of Intent for a Business Purchase: What It Should Say
- Built to Sell Book: Lessons for Owners Planning an Exit
- How to Find a Business for Sale: Where to Look First
- How to Value a Business Before You Buy: Multiples and Seller’s Discretionary Earnings
- Working With a Business Broker: How to Find One and What It Costs
- How to Buy an Existing Business: A Due Diligence Guide
- SBA guide to planning your business
Learn more: KPMG.
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