Business Valuation vs Broker Sale Appraisal
Business Valuation vs
Broker Sale Appraisal
Know the difference before you sell.
A sale appraisal helps you market the business. A valuation helps you understand what it is worth.
Before accepting a sale appraisal or setting an asking price, business owners should understand the assumptions behind each figure.
Two different purposes. Two different approaches.
INDEPENDENT BUSINESS VALUATION
EBIT margin
Earnings Before Interest and Tax.
Add back owner(s) actual benefits
Includes salary, super, vehicles, personal expenses and other benefits.
Deduct owner(s) commercial benefits
Considers the commercial cost of replacing the owner's contribution.
Assess non-financial drivers
Evaluates risks, strengths and sustainability factors that influence value.
EBIT multiple determined by risk analysis and working capital usage
The multiple reflects the business's individual risk profile and working capital requirements.
BROKER SALE APPRAISAL
EBITDA margin
Earnings Before Interest, Tax, Depreciation and Amortisation.
Add back owner(s) actual benefits
Includes salary, super, vehicles, personal expenses and other benefits.
No deduction for owner(s) commercial benefits
Does not consider the commercial cost of replacing the owner.
Assess current market conditions and informal driver analysis
High-level review of market conditions and key business factors.
EBITDA multiple based on recent sales data
The multiple reflects recent sales evidence and current market sentiment.
A sale appraisal will not normally assess non-financial risk and value drivers at the same level as an independent valuation. By not taking these into account, any premium or added value cannot be properly justified.
OWNER REPLACEMENT COST MATTERS
The relevant question is not what the owner received. It is what the business would need to spend to replace the owner’s contribution.
| Example | Amount |
|---|---|
| Reported earnings | $700,000 |
| Add back owner benefits | + $200,000 |
| Deduct commercial replacement salary | – $150,000 |
| Adjusted earnings | $750,000 |
EBIT AND EBITDA CAN LEAD TO DIFFERENT RESULTS
EBIT includes depreciation and amortisation. EBITDA excludes them.
That distinction matters where the business requires significant ongoing investment to maintain operations.
Examples of ongoing investment
- Equipment replacement
- Capital expenditure
- Technology investment
- Vehicles and machinery
- Fit-outs and infrastructure
- Asset maintenance
NON-FINANCIAL DRIVERS AFFECT THE MULTIPLE
Strong non-financial factors can increase value. If these are not assessed, any premium or added value cannot be justified.
- Recurring Revenue
- Diversified Customers
- Capable Management
- Strong Systems & Processes
- Low Owner Dependency
- Reliable Financial Reporting
- Customer Retention
- Transferable Contracts
- Protected IP
- Competitive Advantage
- Growth Potential
- Regulatory Strength
WORKING CAPITAL MATTERS
Working capital can materially affect value and the amount the seller ultimately receives.
- Is working capital included?
- Is stock included or additional?
- Is the price cash-free and debt-free?
- Is surplus cash added?
- Is debt deducted?
- Are shareholder loans adjusted?
- Do liabilities remain with the seller?
A valuation should clearly identify what the concluded value represents.
AVOID SELLER’S REMORSE
Selling too cheaply
- Sustainable earnings understated
- Owner benefits misunderstood
- Valuable systems overlooked
- Recurring revenue not recognised
- Working capital treated incorrectly
- Offer accepted without an independent benchmark
Pricing too highly
- Unrealistic expectations created
- Buyers discouraged
- Business on market too long
- Listing becomes stale
- Confidentiality weakened
- Lower offer accepted under pressure
Seller’s remorse can result from both underpricing and overpricing.
WHAT EVERY OWNER SHOULD DO BEFORE SELLING
1
Obtain an independent valuation
2
Compare with broker's appraisal
3
Reconcile differences in earnings, multiples and assumptions
4
Understand debt, cash, stock and working capital
5
Identify non-financial drivers supporting or reducing value
6
Use both perspectives to guide the sale strategy
A broker appraisal is useful. An independent valuation provides the benchmark.
Every SME owner should have their business valued before accepting a sale appraisal.
- Reconcile differences to prevent buyer or seller remorse.
- A sale appraisal should not be used as the sole basis for internal business succession planning.
Free confidential valuation call
Need clarity on what your business is worth?
Speak directly with an AVI-Certified Business Valuer about the decision ahead of you. Bring your questions and any deadline; we’ll explain the information needed and how your valuation would be scoped.
