Business valuations can be free or can cost up to hundreds of thousands of dollars… yes, really.
The thought of paying thousands might be daunting, especially if you’re just planning to sell and are not ready to start selling yet. However, the good news is, a free valuation might be just what you’re looking for.
In this article, we’ll discuss what impacts the price of a business valuation so you can better decide if you need to pay for one.
How Much Does a Business Valuation Cost?
If you own a company with $25 million in revenue or less, a business valuation can cost you anywhere between $0 (provided by a broker for free) to $40,000.
Depending on which type of valuation you need and the specifics of your business, the price will fall somewhere in that range. There are two main types of valuations you will encounter: legal valuations and fair market valuations.
Legal valuations - These tend to cost between $10,000 - $20,000 for companies doing between $1 million to $25 million in revenue. If your company is smaller (less than 5 million in revenue) a legal valuation will likely cost you less than $15,000.
Fair market valuations - Merger and acquisition (M&A) companies will often perform fair market valuations for companies in the range of $1 million to $25 million in revenue for free as a tool to build a relationship. However, some M&A firms will charge a valuation fee to minimize their risk if your business does not sell.
Within these price ranges, there are a couple of factors that affect the valuation price. Here are the 3 biggest drivers of valuation cost:
1. The Complexity of the Valuation
Three things that can impact the complexity of your valuation are the type of valuation, the data sources, and the analysis of the financial statements:
The Type of Valuation
As we mentioned above, there are two types of valuations - fair market valuations and legal valuations. A fair market valuation will generally be cheaper than a legal valuation.
Legal valuations require the valuation expert to meet specific requirements since it will be used to support legal cases. The person performing the valuation must be certified and the methods they use must follow certain legal standards.
If you are getting a legal valuation for a court proceeding, you may have to pay a premium to get an accurate valuation for your case.
For example, if you are getting a divorce, you will need a legal valuation. If you are selling your business, you will want a fair marketing valuation.
To learn more about which type of valuation you will need, check out our blog “What is a Business Valuation? (And Which Type Is Right for You)”
The Type of Data Sources Used for the Valuation
A valuation specialist will look at sales of other businesses within your industry to compare what they have sold for to determine the multiple your business could be valued at. They will look at data like the sale price, the SDE or EBITDA, and the revenue.
These comparable sales come from databases that valuation providers pay for. These database subscriptions often cost thousands of dollars, so valuation companies pass this on. In some cases, very detailed comparable sales reports are available with a full picture of the sold company’s financials but are costly.
How Deeply Financials are Analyzed for the Valuation
The quality of the final valuation is largely determined by the accuracy of the information that is given to the valuation provider and how much digging they do into the numbers.
To a certain degree, all valuation analysts will look at the numbers on your balance sheets and income statements to make sure they make sense. For instance, if your phone bill is $30,000+ per year - they will ask you about it.
However, some valuation professionals will take an even more meticulous approach and comb through your company’s transactions. The more the valuation analyst needs to inspect, the more the valuation will cost.
Business brokers will not dig into your numbers as much when they perform your valuation because they are performing the valuation on the basis that the information you have provided is accurate.
2. The Size of the Company
Larger companies are inherently more complex - and the more complex your business is, the more expensive the valuation will be.
If your company has multiple locations, different departments, or a complex accounting system, it will be more expensive to have a valuation performed. Some industries are just more difficult to value than others.
The valuation can also be complicated by the cleanliness of the financials or lack thereof. To determine the cleanliness of yours, consider these two questions:
- Do you expense a lot of personal things through the business that will need to be verified?
- Do you accurately track inventory and cost of goods sold?
If the first answer is yes and the second answer is no, you will usually end up having to pay more for a valuation because it will take the analyst more time to get a clear picture of your business’s performance.
3. The Timeline for Your Valuation
Most valuations take a couple of weeks to complete, but in some cases, you can’t wait that long. If you require a detailed valuation on a short timeline you can pay to get the report faster.
In most cases, it’s not a problem to wait, for example when you’re exit planning. However, if you have a partnership dispute or you need capital immediately, it might not make sense to wait 4 - 6 weeks to get a valuation back.
Get the Best Deal For Your Business Valuation
You won’t always be able to use a free valuation, but with this information, you will be able to better understand what the price of the business valuation you need should be.
If you are planning on selling your business, we highly suggest you find a broker who will perform a free valuation for you. A free valuation from a good business broker or M&A advisor can give you the clarity you want without the big price tag.