The Importance Of An Independent & Objective Valuation For Buyers Of Businesses

In most successful business transfers, the business owner has taken the time to lay the groundwork for a clear plan to prepare for the sale of the business and ensure shareholders get full value for the company. One of the most pro-active steps in this plan is conducting an independent and objective business valuation to establish a realistic and fair picture of the business. This is the smartest thing a business owner can do because it protects them but also the transaction. What happens when a pro-active buyer approaches a business that decides not to conduct an independent and objective business valuation?

In contrast, prudent buyers want to make certain they are buying a business that meets their personal and corporate objectives. If you are a buyer (investor, corporate or individual) and are thinking about buying a business, it is prudent to conduct an independent and objective business valuation. Requiring the seller to open up their financials and business operations to a due diligence investigation, in an effort to pinpoint the fair market value, is a legitimate request. Should the seller frustrate this process, then there is something they are most likely attempting to hide - buyers beware!

Beyond due diligence, another reason buyer's should have a professional business valuation performed is to satisfy commercial lending requirements expected by banks. When a buyer requests bank financing to acquire an existing business, some banks will expect a price and consequent loan justification, supported by a business valuation. If property is involved, you can be assured a valuation will be required from a registered property valuer.

What Buyers Should Look For In A Seller

There are a variety of reasons why business owners sell their companies. It is important that individuals, companies or investors seeking to acquire a company conduct due diligence investigations into the business entity, the existing owner, and that owner's history whilst operating the business.

Good qualities to look for in a seller

  • Open to a due diligence

  • Information is organised, accurate, up to date and available to the buyer (financial documents, management accounts etc.)

  • Healthy amount of optimism with a realistic focus for the company's future prospects

  • Is genuinely invested in the deal and sets a reasonable and fair selling price with terms that work for both parties

  • Willing to negotiate win-win terms or financing that will work for both parties

  • Open in discussing financial information of the business

  • Is truthful about areas of concerns in the business and proactive on addressing these areas

  • The seller is willing to discuss an arrangement to remain after the sale of the business to assist with the transition process

  • Long term relationships with loyal employees, clients and suppliers of the business

  • Open for purchaser to speak to their Auditor

Bad qualities to look out for in a seller

  • Avoids providing accurate financial information about the historic results of the business

  • Financial statements not readily available

  • Financial statements do not reflect the results of the business accurately

  • Exorbitant and unreasonable asking price that is out of touch with marketplace prices

  • Refusal to have an objective, third-party business valuation done by a professional firm

  • Unwillingness to leverage professionals to facilitate the sale of the business such as a professional accountant, business broker or advisor

  • Demands unrealistic cash payment and offers little or no seller financing terms

  • Not willing to be much help to the new owner after the acquisition

  • Selling the business because of significant, negative trends in the business or industry

  • Impending lawsuits actions against the business

  • Bad relationships with employees, clients, partners and vendors

  • Poor reputation on the internet, negative press or excessive customer complaints

While financial performance is the primary component analyzed by a informed business buyer, it is critical that other factors be examined and considered when buying a business. Due diligence and going the extra mile can make the difference between buying a winner versus buying a cat-in-a-bag.

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Business Valuation Services" We feel that BVA has allowed us to make the right decision in purchasing the business. Wynand was extremely professional and thorough in his approach. We took a lot of comfort from this and we would recommend BVA to other people. "

Mr. M. Salojee - Businessman