Quick answer: Refer an owner for a transactional valuation when the question is what the business would likely sell for, in what form and with what net result to the owner: before an unsolicited offer is answered, before a sale process is launched, when an exit is being planned, when partners are separating or when an acquisition is being evaluated. Refer for a formal appraisal instead when a tax filing, estate or gift matter, court proceeding or financial reporting requirement calls for a defined standard of value.
Key points
- The trigger is a decision, not a date. A client who is about to respond to an offer, hire a banker, buy out a partner or set an exit timetable needs to know what the business is worth to buyers.
- A transactional valuation estimates likely deal pricing and net proceeds. It is the wrong document for a tax return, an estate filing or a dispute, which require an appraisal.
- Refer early. Owners who learn a value before they have committed to a process can still change the outcome, while those who learn it in the middle of a deal can only react.
- Ask the provider how the valuation is priced and scoped, and whether it is separate from any advisory services.
The test: is there a decision behind the question?
Business owners ask their trusted advisors “what is my company worth?” for many reasons. Some are idle curiosity. Others sit in front of a decision that will be shaped by the answer. The second kind is when a transactional valuation earns its cost. A good rule is to ask the client what they plan to do with the number. If they are about to act on it, a valuation designed for deals is likely the right tool.
The overview of transactional valuation defines the product. In short, it estimates what buyers are likely to pay, how the deal might be structured and what the owner would net after debt, working capital, fees and taxes.
Situations that call for one
An unsolicited offer. A client receives an approach from a competitor, an investor or a stranger. Without an independent view, the owner cannot tell whether the offer is strong or opportunistic, and the buyer controls the conversation.
Before engaging a sale advisor. An owner who is considering a sale benefits from knowing what the business could fetch and what buyers will question, before deciding whether to go to market, who should lead it and what to fix first.
Exit planning. An owner who plans to leave in a few years needs a baseline value to set targets, assess the gap between what the business is worth and what the owner needs, and decide what to improve. The guide to when to sell discusses timing.
A partner dispute or separation. Partners who want out, or who are considering buying each other out, need a neutral reference for negotiation. If the buy-sell agreement requires a formal appraisal, that comes first, and a transactional view can complement it. The guide to partner buyouts discusses the issues.
Evaluating an acquisition. A client buying a business needs a view of what it is worth to them and what price to walk away at, which is a buy-side question.
Capital raising or lending discussions. An owner talking to an investor or a lender needs a grounded view of enterprise value and how it relates to the debt the business can carry.
Succession within the family or management team. When the next generation or managers will buy the business, the price needs support that both sides can accept. Formal appraisal may be needed for gift or estate purposes, which leads to the next section.
When another tool fits better
| Situation | Better fit |
|---|---|
| Tax filing, gift or estate transfer | Formal appraisal to the standard the tax rules require |
| Shareholder dispute, divorce, litigation | Appraisal or expert valuation under the governing legal standard |
| Financial reporting (fair value measurement) | Valuation prepared to accounting and audit requirements |
| Employee stock plan | Independent appraisal as the plan rules require |
| Quick sanity check with no decision pending | Conversation with an experienced advisor, or published industry data |
The comparison of transactional valuations and appraisals explains the differences, including which professional standards govern an appraisal.
Illustrative example: A referral that changed the response to an offer
A distribution company owner with adjusted EBITDA of $2,400,000 receives an unsolicited offer that equals 4.5x, or $10,800,000, from a competitor. The owner’s CPA suggests a transactional valuation before replying. The analysis finds that buyers of comparable businesses are more likely to pay between 5.5x and 6.5x, and that the competitor’s offer treats a large share of working capital as debt-like. The owner declines to engage on the first offer and approaches other buyers through a managed process. The case is hypothetical and the numbers are invented to show how a valuation can inform the response to an offer. They are not benchmarks.
What to tell the client
- It is a range, not a price. The result is a supported view of likely pricing, and the actual price depends on the buyers and the process.
- It needs good records. The provider will request financial statements, tax returns and an explanation of owner-related expenses. The guide to preparing for a valuation lists them.
- It stays confidential. The provider should be able to explain how the client’s information is protected.
- It does not commit them. The owner decides what to do next.
What to ask a valuation provider
- What question will the work answer, and what will it not answer?
- Which methods and evidence will be used, and how will the results be reconciled?
- Will the report show the effect of debt, working capital and transaction costs on the owner’s proceeds?
- Who prepares the analysis, and who is available to explain it?
- How is the valuation priced, and is it separate from any advisory services the provider offers? A valuation that is conditioned on an advisory engagement raises a question about independence.
- What is the timeline, and what information is needed to meet it?
The Impetus Group provides transactional valuations as a separate engagement with its own fee, and separately provides sell-side and buy-side advisory. The guide on what a useful valuation contains gives a checklist for reviewing any provider’s work.
Staying involved
Referring the client does not remove you from the picture. CPAs, attorneys and wealth advisors all have a role in the sale of a client’s business, and the earlier they are involved, the better the outcome. The guide for CPAs describes where the accounting relationship fits, and the comparison of advisors and brokers helps the client choose who should run a process if one follows.
Frequently asked questions
Does referring a client for a valuation commit them to selling?
No. A valuation is information, not a mandate. Many owners commission one to understand their options, test a buyer’s offer or set goals years ahead of a sale. Telling the client that explicitly makes the conversation easier.
How is a transactional valuation different from the valuation my firm already does for tax purposes?
A tax or estate valuation follows a defined standard of value and professional standards, and it is written to be defended before a taxing authority. A transactional valuation looks at what buyers are likely to pay, how deals are structured and what the owner would net. The two answer different questions and are not interchangeable.
Can a client use a transactional valuation in negotiations with a buyer?
It can inform the owner’s expectations and the response to an offer, and the owner decides whether to share any of it. Buyers form their own views. The document’s main use is giving the owner a clear, evidence-based position before talks begin.
What should I tell the client to expect?
That the provider will ask for several years of financial statements and tax returns, a description of the business and an explanation of owner-related expenses, that the result is a range supported by reasoning, and that the engagement may take a few weeks depending on the quality of the records.
A client asking what their business is worth?
The Impetus Group works with CPAs, attorneys and other advisors on transactional valuations and M&A advisory, so the client relationship stays with you. Book a discovery call to talk through a client situation.
Related guides
- Transactional Valuation: What It Is and How It Works: A transactional valuation estimates what a strategic or financial buyer would pay for a business. Learn what goes into one and how it differs from an appraisal.
- Transactional Valuation vs. Appraisal: Which Do You Need?: A transactional valuation estimates what a buyer would pay. An appraisal estimates value under a legal or tax standard. See how they differ and which one fits.
- What a Useful Valuation Analysis Contains: A Checklist for Reviewing Advisors: A checklist for advisors reviewing a client’s business valuation: scope, normalized earnings, evidence, reconciliation, net proceeds and the warning signs.
- How CPAs Support Clients Through the Sale of a Business: Where the CPA fits when a client sells a company: readiness, normalized financials, tax structure, diligence support, the working capital true-up and proceeds.
- When to Sell Your Business: Signals, Timing and Readiness: How to judge when to sell: personal goals, business performance, buyer demand and readiness, with a scorecard and the alternatives to a full sale.
- Keeping Your Client Relationship Through an M&A Process: A Guide for Advisors: How CPAs, attorneys, wealth advisors and bankers can stay central to a client’s sale: roles, communication, conflicts and what to ask an M&A advisor.
This guide is general education. It is not a valuation opinion, appraisal, investment advice, or legal or tax advice. How these guides are made.