For many SME owners, the first step in planning a sale is to obtain a business valuation. A strong valuation can boost confidence, while a disappointing one may delay plans. Yet valuations are not always what they seem. Too often, business owners are presented with figures that look impressive but are not grounded in reality. Misleading valuations can create false expectations, stall negotiations, and ultimately cost owners both time and money.
1. Overreliance on Industry Multiples
Many brokers and advisers rely heavily on broad industry multiples to calculate value. While simple to apply, these figures ignore the specific strengths and weaknesses of your business. Multiples can also be outdated or based on transactions in very different markets. A realistic valuation should always consider the unique circumstances of your company.
2. Ignoring Normalised Earnings
Headline profits may not reflect the true earning potential of the business. Items such as one-off expenses, owner remuneration, or unusual revenue streams can distort the numbers. A robust valuation will adjust for these factors to present a fair picture of sustainable earnings. Without this step, the value may be overstated and collapse under buyer scrutiny.
3. Overlooking Working Capital Requirements
A valuation that ignores working capital can mislead owners about the net proceeds they will receive. Buyers expect a normal level of working capital to remain in the business at completion. If this is not factored in, the seller may be surprised to see the final price reduced.
4. Failure to Consider Deal Structure
Valuations often assume a cash transaction at completion. In reality, many deals involve earn-outs, deferred payments, or contingent elements. A headline valuation that does not reflect the likely structure of a deal can create unrealistic expectations and disappointment later.
5. Lack of Independent Challenge
Some valuations are designed more to win business than to provide accuracy. Inflated figures may encourage owners to sign up with a broker, but these valuations rarely hold up during negotiations. Independent, specialist advice helps ensure you receive an honest assessment, even if it is lower than you hoped.
Final Thoughts
A valuation should be a reliable guide, not a sales pitch. Owners need to understand how figures are calculated, what adjustments have been made, and how deal terms can impact the outcome. Spotting a flawed valuation early can save time, protect credibility, and lead to a more successful sale.
