How Much Does a Business Valuation Cost?
Whether you're buying or selling a business, the crux of the deal will be finding a fair purchase price. To do so, you will need to valuate the business at issue, and more importantly, remain objective and unbiased.
All too often, business owners inflate the value of their businesses, which can draw out the sales process, or prevent any sale from ever closing. It's not surprising that the owners who have spent years of effort and sacrifice put a greater value on the goodwill, or brand of their company, rather than remain grounded in the calculus of financials-based valuations.
For this reason, business owners, interested buyers, and the brokers that bring them together must focus on market-grounded financial calculations to get valuations, and in many cases, benefit from a neutral third-party business valuation.
There are several ways to get a fair market value for a business, and the cost of the valuation generally increases as the business value does. Smaller, Main Street businesses usually won't benefit from an expensive formal valuation, while a larger multi-million dollar company will require a professional appraisal to satisfy the financiers and help alleviate investor concerns on price.
The cost to valuate a business ranges from $0 for owners who take the time to learn the process and get the data on their own, to tens of thousands of dollars for a professional analysis by a credentialed expert. There are generally four "levels" of business valuation, which are successively more involved, and more costly:
"Benchmark" Market Valuation: $20 - $100
For business owners looking to get a ballpark business valuation of a private business, there are several market-data based services that use recent sales prices of "comparable" businesses to determine a market value for a new entrant to the business for sale market. What business owners are paying for with these types of reports is access to the data necessary to understand what buyers are offering for different types of businesses in a local market. Because these sales are held confidentially, sales prices are not generally made public, but the platforms on which the transactions occur will anonymize and aggregate this sales data to calculate local valuation multiples.
BizBuySell's valuation report is such a service, and will generate a price range for a business based on its financials, industry, and local market trends.
Broker's Opinion of Value: Cost Included as Part of Brokerage Agreement
For business owners working with a broker, valuation is part of the overall service agreement. Business brokers have a unique insight into the local business for sale market and understand the qualities that improve or reduce business values.
It's uncommon for business brokers to offer a valuation service separately, instead including a "Broker's Opinion of Value" as part of the brokerage agreement. So, the cost is included as part of the broker's commission.
Professional "Comp" Analysis: $500 - $5,000
Some business owners will opt for a service that goes beyond a calculated benchmark and includes a personalized analysis. These are also based on "comp" data, but offer customized adjustments based on the specific qualities of your business. Working with a professional in this limited capacity is helpful when you want to understand why the local market is pricing businesses like yours at the rates it is, and what you can do to improve your price and chances of selling.
A valuation report from a service like DealCoach or BizEquity generally includes several personalized reports and market analyses that will help you understand your business' fair market value, and the levers you have to improve it.
Formal Business Appraisal: $5,000 and up
For larger private companies where private equity firms, multiple investors, or banks are involved, a business appraisal performed by a trained professional will generally be necessary. Reports prepared by an expert (Certified Business Appraiser, Certified Valuation Analyst, or CPA Accredited in Business Valuation) are far more involved than the above options. They include detailed analyses leveraging several valuation methods, and take into account all available market data and business criteria to arrive at a defensible value.
As you can imagine, professional appraisals are the costliest option, starting at a minimum of $5,000 and easily exceeding $10,000 or more. This cost is generally justified when the business price is well over $1,000,000, and may also be required when litigation is involved, like splitting up a business during divorce.
What Do You Need?
Whether you're buying, selling, or investing in a business, it's important to understand the valuation process at a general level, so you're better equipped to choose the right option to pin down a price without breaking the bank. Start by reading through our Valuation Learning Center to find a wealth of information and market stats to get more comfortable with the process, and see BizBuySell's quarterly Insight Report to get a pulse on the broader business for sale marketplace.