Small business
Why two valuations of the same business can differ, and which one your lender will use
Different purposes call for different standards of value. Understanding why can save you from a nasty surprise at closing.
By [Founder name], Ph.D. 6 min read
It happens more often than you'd think: an owner gets one number from a broker, another from an accountant, and a third from a lender's valuation. All three may be done competently. They differ because they answer different questions.
Standard of value
The first thing any valuation should state is its standard of value: the definition of "worth" being measured.
- Fair market value: the price between a hypothetical willing buyer and seller, both informed and under no compulsion. Used for SBA lending and for estate and gift tax.
- Fair value: often defined by state law or the company's own agreements, and common in shareholder disputes and some divorces.
- Investment value: what the business is worth to a specific buyer, including their own synergies.
A strategic buyer might pay more than fair market value. That doesn't make the lender's number wrong. It's measuring something different.
Normalization choices
Every valuation adjusts reported earnings. How much the owner "should" be paid, which expenses are personal and what counts as one-time can move earnings significantly, and every dollar of earnings is multiplied in the final value.
Approach and multiple
Valuers use income, market and asset approaches, and weigh them differently depending on the business. The choice of comparable transactions and the risk assessment behind the multiple are where judgment matters most.
A good valuation doesn't just give you a number. It shows you how it got there, so you can see exactly where reasonable people might disagree.
Which one will your lender use?
For SBA loans, the lender typically needs an independent valuation from a qualified source that meets SBA requirements. A broker's opinion of value or a valuation prepared for a different purpose usually won't satisfy that requirement. If you're financing a purchase, ask your lender early what they will accept.
How to avoid surprises
- Be clear about the purpose before the work begins.
- Ask what standard of value will be used.
- Review the normalization adjustments. You know your business best.
- Choose a valuer who is independent of the transaction.