Is it a mistake to price my business based on a friend’s sale?

A friend sold a business and told you the price. It is natural to want to know what that means for yours. The price is a headline figure, though. What makes a sale comparable is what sits behind it: the earnings, the assets, the terms and the circumstances. Without those, a single price tells you very little about your own business.

How comparable sales are used

BDC lists three methods a valuator may use: discounted cash flow, asset-based valuation and market multiples. The market multiples method applies ratios derived from comparable transactions or public market data to the company’s financial metrics, such as revenue or EBITDA. A transaction supplies a ratio, not a price to copy. Your friend’s price becomes a ratio only if you also know the earnings or revenue it was measured against.

What can differ between the two deals

BDC names financial performance, growth potential and strategic fit as drivers of price, and asks how easily the business can operate without the current owner. It adds that the quality and condition of tangible and intangible assets contribute to the valuation. Compare each one. Did your friend’s business depend on them personally? Did the price include real estate or inventory? BDC also describes vendor financing and earnouts, which hold back or defer part of the price, so a headline figure may not equal money received at closing.

Using it as a prompt, not a price

Treat your friend’s sale as a reason to ask questions, then test your own number against an independent source. BDC says it is important to engage a Chartered Business Valuator to get a realistic market-perceived price. It also says the final purchase price is based on factors that include a valuation assessment and reliance on the current owner. A buyer’s due diligence can still produce price chips, so the number you start with is not necessarily the one you finish with.