When valuing a SME business, how important are sales of other businesses to the valuation?
Most credible business valuations of smaller and medium sized businesses will include some commentary on sales of others businesses as part of the overall valuation process. But how relevant are these other business sales?
Many valuers will call these other transactions comparable sales. I have some difficulty with the phrase comparable sales, as unless I know the other transactions intimately how can I know if they are comparable. I prefer to use the phrase market evidence.
Each transactions has subtleties such as whether or not the buyer or seller was under some pressure (health, financial, divorce), terms of leases, systems and processes, key person reliance, financial trends, deal structuring, earn outs and vendor finance.
That is not to say that other transactions are irrelevant. If the valuation I prepare comes up with a valuation outside the norm of a basket of transactions, clearly I would need to explain why there may be a difference.
The relevance of other transactions will depend on the number and similarity of transactions, as well as the amount of credible information available. If there are numerous credible similar transactions which occurred at a similar multiple, the more relevant those sales are to the valuation.
At the other end of the spectrum, others have suggested that as each business is different, the valuation must be built from the ground up without external sales.
From my perspective, whilst I agree that each business is different, the real world is also relevant and commentary on sales of other businesses should be included in a valuation.
Peter Wallace
Endeavour Capital
Sydney
Business sales & acquisitions | Business valuations | Corporate Advisory | Exit Ready