The Importance of an Independent Valuation

Posted on February 14, 2010 · Posted in Blog

Transferring ownership in a business is similar to selling any other asset like a house or a car. The buyer and seller agree on terms, create a binding legal document describing the terms and conditions, have an inspection period, and go through a closing where ownership is transferred to the buyer.

However, unlike most other transactions the final selling price and terms are not always determined by the buyer and seller. In the vast majority of cases, they are set by the 3rd party lending the money.

The lender typically requires an independent valuation of the business and will lend based on this valuation. With this in mind, we always recommend that the first step a potential seller takes is to get an “independent” 3rd party valuation of the business.

An independent valuation sets the expectation for the sales price. If the valuation does not meet the needs and expectations of the seller, then it may not be the right time to sell the business.

Why go through the effort to list the business, negotiate with a buyer and come to terms when it may all be unacceptable to a lender?

A valuation sets the right expectation for the seller. If it does not meet the seller’s needs, then the business should not be listed for sale.