Further, business sale transactions are not a single number, they are generally a collection of commercial terms from the closing payment, deferred payments, loan notes, excess cash, rolled equity, earn-outs, etc These all need to be factored in and applied against risk factors. And then there are the banks. Most businesses are bought with some debt (like buy-to-let flats) so Buyers are relying on some lending. The banks will often only lend up to a certain point and actually not lend on transactions they feel have been overvalued. Lastly and almost most importantly, the cash flow has to work. The debt paid back to the bank, any deferred payments to the Seller, additional costs post-sale like a new Managing Director or Finance Director, etc. all have to be manageable within the available cash flow. Otherwise, the transaction does not work with that particular Buyer despite all the philosophical arguments around valuation. Many times business Sellers will mention that their accountant, financial adviser, Uber driver, brother-in-law, etc. said their business was worth X. Upon further investigation there was no method used for this option and in fact, none of these people is involved in daily working with buying and selling businesses in the real world. So the fact is there are methods and science that are helpful as at least as a foundation that gives us a starting point and a lens we can all work from. An experienced business valuation/M&A professional can be very helpful to work through all the aspects of the valuation as well as work on the financial models (and negotiating) with Buyers and Sellers. But it is important to understand the fundamentals to participate effectively in the process and make sure they feel they are getting the right (a good) deal in their own mind.
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