As a business valuation analyst, one of the first questions I ask is: who is this valuation for? It’s not just about tailoring the report to the client audience – the client (and their requirements) themselves can change the value.

The theory of business valuation is generally based on fair market value – the price two well-informed, willing parties might agree on in an open market. But in practice, the real world doesn’t always play by the textbook.

Sometimes, the seller sees value the buyer doesn’t. Or the buyer sees strategic value others would overlook. That’s when things get interesting.

One Size Doesn’t Fit All

Where we typically see this imbalance of perceived value discussed is with strategic buyers and investors. These types of buyers often have unique motives when making an acquisition. They might be willing to pay more for synergies, capabilities, talent, or access to a new market. Equally, a vendor may have overspent in parts of their business that the buyer doesn’t care about – and therefore won’t pay for.

We see this all the time in residential real estate: the home owner spends a fortune on a custom kitchen or fancy landscaping, only to find buyers aren’t interested. Buyers won’t pay extra for something they don’t want, and sellers are left disappointed.

The same applies to business sales.

Case Study: When It Works (Just)

In one of my engagements, a business owner had a strong local company and sought to attract international buyers. But there was a catch: their core ERP system was built in-house on legacy tech. That made potential buyers nervous.

To address the issue, the owner spent seven figures replacing their antiquated ERP with a modern, third-party platform. The twist? None of the target buyers actually used the selected platform. It didn’t add value in their eyes – but it did remove a major risk.

In the end, the spend paid off. The sale price comfortably exceeded the cost of the new system. But less than a year after the deal closed, the buyer scrapped it and migrated everything to their own proprietary ERP. That’s overcapitalisation with a silver lining. The business went from being subject to a heavy discount by buyers to achieving a competitive market price.

Case Study: When It Doesn’t

Another client built a successful IT company from his garage. When he decided to sell, he thought a slick office would impress buyers. So he leased and fitted out new commercial premises – a costly move he thought would yeild a higher price.

It didn’t. None of the potential buyers placed any value on the new office and fitout.

Sure enough, the successful buyer shut down the new office within a month of acquiring the business, relocating the team to their own facility. They placed zero value on the new office. The fitout was a sunk cost – and the vendor paid for it. Indeed, all of the likely buyers were established competitors with their own facilities, and would have done the same.

Had the vendor left the business in the garage, the valuation gap between seller and buyer would have been smaller – and the vendor’s net proceeds, larger.

Know What It’s Worth To You

If you’re buying a business, don’t accept the vendor’s valuation as gospel – even if it’s backed by glossy reports. Ask yourself: what’s it worth to me?

Just because someone’s calling it “fair market value” doesn’t mean it fits your strategy, your risk profile, or your plans. You’re not buying their history – you’re buying your future.

And if the numbers don’t work for you? Walk away.

Rule #1 of buying a business: don’t overpay^*.

* This is actually Rule #3 of the Ferengi Rules of Acquisition. Close enough