Low Valuation: What to do if the Valuation Is Lower Than The Purchase Price
A business valuation serves as an essential tool when negotiating a business purchase or sale. However, one of the more challenging scenarios arises when the valuation is lower than the agreed-upon purchase price. For both buyers and sellers, this situation can significantly impact negotiations and the ultimate terms of the deal. Whether you are purchasing or selling a business, it is critical to understand what a lower-than-expected valuation means and how to move forward strategically.
As a professional business appraiser, Peak Business Valuation values small businesses on a regular basis. In this article, we discuss how to move forward when a valuation is lower than the purchase price. To learn more about the value of a small business, see Valuing a Small Business or Value Drivers for a Small Business.
Peak Business Valuation works with thousands of individuals looking to buy, grow, and sell companies throughout the country. We are here to assist you with a business valuation for your business. In addition, we can discuss any questions you have on valuing a business or low valuations. Get started by scheduling a free consultation with Peak Business Valuation below!
What Does a Lower Valuation Mean?
Receiving a valuation that is lower than a business’s purchase price has different implications for buyers and sellers. This article highlights how both buyers and sellers can handle a valuation-price discrepancy.
Low Valuation For Buyers:
When you receive a valuation lower than the agreed purchase price, it is important to take action. A lower valuation suggests the business may not be worth what the seller claims. This could indicate underlying issues with the business’s financial health, market position, or growth potential. From a buyer’s perspective, a valuation lower than the purchase price may be a sign to do additional due diligence. This can help you identify any risks or challenges that were not apparent before. In addition, it is important to assess the company’s financials and operations to determine why the valuation came in lower.
At this stage, you may want to reassess the offer and determine whether the investment is still worthwhile. Additionally, a low valuation gives buyers a strong opportunity to renegotiate the purchase price. We discuss more on this in the next section. Working with a professional business appraiser can help you effectively navigate this scenario. Reach out to Peak Business Valuation if you have any questions!
Low Valuation For Sellers:
If you are selling a business, a valuation that falls short of the purchase price can be discouraging. The first step is to accept the valuation and create a strategy to move forward. It is important to note that a lower valuation is not necessarily a reflection of the business’s long-term potential. It may be a result of temporary market conditions or areas that need improvement within the company.
Sellers can use this opportunity to assess what caused the low valuation. By understanding these issues, you can identify ways to maximize the business’s value before proceeding with the sale. To learn more about increasing the value of a business, see Value Drivers for a Small Business.
As a business appraiser, Peak Business Valuation works with buyers and sellers of businesses weekly. As such, we can provide you with a small business valuation and help you navigate complex valuation scenarios. Peak can also answer any questions on valuing a small business and low valuations. Start by scheduling a free consultation with Peak below!
Moving Forward When the Valuation is Lower Than the Purchase Price
For Buyers:
Once you have received a low valuation, the next step is determining how to proceed with the transaction. If you are looking to buy a business, there are several options for moving forward. First, you may try to renegotiate the purchase price based on the updated valuation. Having concrete evidence from a professional business valuation can strengthen your case during the negotiation. The valuation report also promotes transparency and helps build trust between the buyer and seller. Check out Business Valuation Report Made Simple for additional insights.
In addition, the buyer can choose to adjust the deal structure. For example, requesting seller financing or earnout agreements can offset the difference between the valuation and the seller’s ideal purchase price. This enables the seller to get their desired ROI while ensuring the buyer is not overpaying.
For Sellers:
Next, sellers also have several options when dealing with a low valuation. If you have time or are able to delay the transaction, the business seller should assess the valuation report. The valuation report highlights the strengths, weaknesses, risks, and opportunities of your business. You can use this information to make strategic adjustments to boost the value of your business before the sale.
On the other hand, if time is a price discrepancy, an obvious option is to renegotiate the purchase price. However, sellers should not feel compelled to lower the purchase price immediately. Sellers can consider various deal structures that help close the gap between the valuation and the asking price. This allows the seller to retain some control over the final payout while reassuring the buyer.
Conclusion
Whether you are buying or selling a business, receiving a valuation lower than the purchase price can have complex implications. As such, it is important to carefully consider the best approach. This should include examining the valuation report and having transparent conversations. In addition, a professional business appraiser like Peak Business Valuation can provide you with further insights and suggestions on low valuations.
At Peak Business Valuation, we understand the importance of complex valuation scenarios. Whether you are buying or selling a business, we are happy to provide you with a business valuation and help you take the next steps. We are also here to answer your questions on how to value a small business and keys to maximizing the value of a business. To get started, schedule your free consultation with Peak Business Valuation today!
