Why comparable sales data is key to a business valuation
The adage – the value is what someone is willing to pay – bears some truth in the context of a business sale. When preparing to sell a business, a business valuation is key to determining market value and therefore, how much a business should be sold for. Numerous business valuation methods can be used to value a business, although how can business owners gauge how much a business is realistically worth in today’s economic climate?
This is where using comparable sales data can help refine the value of a business and minimise the risk of underestimation and overestimation. Paul Williamson of Selling My Business runs through why access to data on similar sales can maximise value for money and prove to be invaluable when financial planning.
What is the comparable sales method?
A popular valuation method is using comparable sales data which consists of using evidence from previous sales, including the actual valuation price and sale price to guide the valuation process.
According to the Royal Institution of Chartered Surveyors (RICS), comparable evidence must be:
- comprehensive – there should be several comparables, rather than a single transaction
- very similar or, if possible, identical to the item being valued
- recent, i.e., representative of the market on the date of valuation
- the result of an arms-length transaction in the market
- verifiable
- consistent with local market practice and
- the result of underlying demand, i.e., comparable transactions have taken place with enough potential bidders to create an active market
Mitigating factors will often shape how much potential buyers are willing to pay, such as market conditions, political unrest, and buyer demand.
For example, during the Covid-19 pandemic, e-commerce platforms, pharmacies, PPE firms and camping businesses experienced growth, while clothing, footwear, and furniture retailers experienced a slump in trade, according to ONS (Office for National Statistics) data. This shaped buyer demand for businesses that naturally experienced an increase in sales during the Covid-19 health emergency.
Why is comparable sales data essential to a business valuation?
Your business valuer must run a fine toothcomb through their comparable database and zoom into factors, such as location, opening hours and the quality of fixtures and fittings, including replacement value and auction value.
This information can help pinpoint the gap between how much the business is worth and how much buyers are willing to pay following negotiations. It erases any ambiguity around the minimum and maximum potential of a business based on similar sales.
This data is often difficult to find for goodwill businesses, which is where the expertise and knowledge of an experienced business valuer can prove beneficial. A reputable business transfer agent will often have access to a vast database of comparable evidence due to their experience and industry track record. Intermediary firms that do not have access to such data may often compensate for this by charging an upfront fee which can leave room for error, such as overpricing.
As a bottom line, business valuations must not be limited to financial data only as each business is unique.