Valuation

Definition

What a business is worth to a buyer, stated as a price or a range.

Why It Matters

The word names an opinion produced by a method, and the method is what a buyer argues with. A broker's asking price, a lender's appraisal and a buyer's own model can all be called the valuation of one business and land far apart, because each answers a different question: what the seller hopes for, what an institution will lend against, and what the earnings support once the owner's work is paid for. So ask which method produced any number you are shown, and what it assumed goes with the business. A valuation of the assets and a valuation of the earnings are not two estimates of one thing.

In numbers: A business with $1.5M of SDE is a $4.5M business at 3x and a $6M business at 4x, and which of those it is decides whether the deal is financeable.