What a Valuation Actually Tells You, And What It Does Not

Jun 10
3 min read

Category: Business Advisory | Valuation Reading time: 4 minutes

A valuation is not an objective finding. It is an opinion, shaped by method, assumption and purpose. The number at the bottom of the page is the output of a series of choices, choices about which method to use, which inputs to apply, and which version of the future to assume. Those choices are not neutral. And the person who commissioned the valuation had a view about what they needed the number to say.

That is not a criticism of valuers. It is simply how the discipline works. Understanding it is the difference between a founder who negotiates well and one who accepts a number they do not fully understand.

Different valuation methods yield different results and a buyer chooses the outcome that suits them best

Who commissioned it matters as much as what it says

A valuation prepared by a buyer's adviser is built to justify the buyer's offer. A valuation prepared by a founder's accountant may be built for tax purposes, or for an ASIC requirement, or to satisfy a bank. A valuation prepared for a capital raise is designed to support a particular price in a particular market at a particular moment.

None of these is the same thing as what your business is worth to the right buyer, in the right structure, at the right time. Before you sit down across the table from anyone, you need to understand which of those things you are actually holding.

The method produces the number

The three most common approaches, discounted cash flow, comparable transaction multiples, and asset-based valuation, produce genuinely different numbers for the same business. A DCF is highly sensitive to the discount rate and the terminal growth assumption, both of which involve judgement calls that can move the output significantly. A comparable transaction approach depends entirely on which transactions are selected as comparable and whether the market conditions at the time of those transactions resemble the current market. An asset-based approach may capture the balance sheet and miss the earnings entirely.

A sophisticated buyer knows this. They will choose the method that produces the lowest number and present it with confidence. You need to know which method favours your position and why.

What the number typically does not capture

Formal valuations are built on reported financials and stated assumptions. They frequently miss the things that a buyer will look hardest at once they are inside the data room.

Customer concentration is one. A business where three customers account for sixty per cent of revenue carries a risk that does not appear explicitly in an EBIT multiple. Key person dependency is another. If the business runs on the founder's relationships and the founder is leaving, the sustainable earnings base is not the same as the historical one. The quality of recurring revenue matters. A retainer book is different from project revenue, even if the total looks the same. Normalised earnings are different from reported earnings once you strip out the owner's personal expenses, the related party arrangements, and the one-off items.

Each of these adjustments moves the number. Knowing where they will land before a buyer finds them is the difference between controlling the negotiation and reacting to it.

Why an independent view changes the conversation

Getting an independent assessment before you engage with a buyer or a broker is not about producing a competing number. It is about understanding your own position with enough clarity that you cannot be moved by a confident presentation of someone else's number.

The founder who knows what their business is actually worth, and why, negotiates from a different position entirely.