Business valuation vs sale price

A seller who commissions a valuation may expect the sale to close at that number, but the two figures answer different questions. A valuation asks what a business is worth under a stated standard of value. A sale price asks what these two parties will sign for. Both can appear in the same sale, so it helps to keep them apart. This page compares them using BDC guidance, CBV Institute’s glossary and the Canada Revenue Agency (CRA), without suggesting what any seller or buyer should accept.

What a valuation is

BDC’s glossary defines valuation as the process of determining the economic value of a business, and BDC guidance says valuators generally offer a price range the company would probably sell for to an arm’s-length party. The standard is a hypothetical one. CBV Institute’s glossary describes fair market value by reference to a hypothetical willing and able buyer and seller, each acting at arm’s length in an open and unrestricted market, when neither is under compulsion to buy or sell and both have reasonable knowledge of relevant facts. BDC notes that you can expect a wider range for smaller companies and businesses in certain sectors, such as technology. A valuation is an estimate prepared for a purpose, not a term of any contract.

What a sale price is

A sale price is a term of a contract between actual parties. The CRA notes that a sales agreement may set out a price for each asset, a value for the inventory and, if applicable, an amount attributed to goodwill. In other words, the price is written into the agreement and may be split across components. Nothing in that description requires the figure to match anyone’s valuation. It is whatever the parties accept, set out in the agreement they sign.

Why the two figures can part ways

BDC calls a valuator’s figure just a guideline for how to approach negotiations in a sale, and says the final transaction price is often different. It names what influences the final price: the seller’s eagerness to sell, the buyer’s strategic interests or expected synergies, available financing, due diligence, and the company’s capacity to transition smoothly to new ownership. BDC also states that a valuation reflects the company’s stand-alone value, without any potential synergies or strategic considerations from the buyer, and that it is common for this figure to differ from the final transaction price.

Who is on each side of the figure

• The valuation assumes an arm’s-length party, while a real buyer may be a relative or another party with a particular relationship to the seller.
• BDC gives the example that a family member may be able to get a cheaper price.
• The valuation assumes a hypothetical buyer and seller; the sale involves two named parties with their own circumstances.
• The valuation is prepared for a purpose; the price is set in an agreement that both sides sign.

What decides how far apart they sit

These are factors, not advice. If the seller is eager to sell, then BDC lists that as something that influences the final price. If the buyer expects synergies or has strategic interests, then those fall outside the stand-alone value BDC says a valuation reflects. If financing is unavailable or on tight terms, then the price the parties can reach may change. If due diligence turns up issues, then the figure on the table may be reopened. If the buyer is a relative, then the arm’s-length assumption behind the valuation may not hold. For how a headline price relates to enterprise value, see price vs enterprise value. A chartered business valuator, accountant and lawyer can each speak to their part of this.