Fair Valuation for Off-Market Acquisition?

November 08, 2024

by a searcher from The Tulane University of New Orleans in New Orleans, LA, USA

How do you all recommend coming up with a fair valuation if a broker isn't involved?

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Reply by a searcher
from American University in Washington, DC, USA

Valuations for off-market and on-market acquisitions are generally similar, as they’re based on industry averages within specific subsectors. The main advantage of buying off-market is the potential to secure a better price. Often, sellers will have already obtained valuations from firms like Stout, Duff & Phelps, or Houlihan Lokey, based on average market multiples. Additionally, once a deal is close to finalizing, most banks will require their own valuation report to support financing. Market averages are readily available in most sectors, even for niche areas. For off-market acquisitions, an inexperienced seller can sometimes present a unique opportunity, as they may lack a clear understanding of current market standards. Brokers often play a crucial role in aligning a seller’s expectations with the market, helping them understand if their initial off-market valuations are unrealistic. Without broker fees, which typically range from 5-10%, buyers and sellers can benefit from substantial savings on the transaction. However, brokers add value by navigating complex deals and negotiating advantageous terms—particularly in transactions involving property or highly specific niches—which can sometimes justify their cost.

Reply by a searcher
from Harvard University in Bellevue, WA, USA

When doing off-market deals, the best first step is to get an NDA signed and review the financials. From there, normalize cash flow (SDE or EBITDA), then apply fair market multiples based on comps in the space. It may take some coaching to help the seller understand how businesses are typically valued -- especially if they’re unfamiliar with EBITDA or industry norms. The key is grounding the conversation in the numbers and staying aligned on a fair, market-based framework.

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