Why is an Estate Business Valuation Different From a "Normal" Business Valuation?

An estate business valuation can be different from a normal business valuation for several reasons:

• Purpose: The purpose of a business valuation for estate tax purposes is different from a normal business valuation. In estate planning, the valuation is used to determine the value of the decedent’s assets and liabilities for estate tax purposes, while in a normal business valuation, the valuation is typically used to determine the fair market value of a business for sale or merger.

• Timeframe: The timeframe for an estate business valuation may be different from a normal business valuation. In an estate business valuation, the valuation date is typically the date of the decedent’s death or an alternate valuation date that is six months after the date of death. This can result in differences in the valuation due to changes in the business’s financial performance and market conditions.

• Discounts and premiums: Discounts and premiums may be applied differently in an estate business valuation compared to a normal business valuation. In an estate business valuation, discounts for lack of control and lack of marketability may be applied to reflect the fact that the business interest being valued may not be marketable and may not provide the same level of control as a controlling interest. Additionally, premiums for control may be applied if the estate owns a controlling interest in the business.

• Tax laws: The tax laws governing estate taxes may result in differences in the valuation between an estate business valuation and a normal business valuation. For example, the estate tax laws may allow for certain deductions or exemptions that would not be available in a normal business valuation.

Overall, an estate business valuation takes into account the unique circumstances of the estate and the estate tax laws, which can result in differences from a normal business valuation.

Unrealistic Valuations

Warren Buffett said it best: “Price is what you pay, value is what you get.”

One of the biggest struggles with selling in the lower to middle market is business valuation expectations. The top reason for deals not closing in 2022 was due to a valuation gap in pricing.

Of those transactions that didn’t close due to a valuation gap in pricing, approximately 69% had a valuation gap in pricing between 11% and 30%. Sellers almost always feel their business is worth far more than what the market will bear. Here are a few basic reasons explaining this valuation gap:

• The owner is valuing assets, not cash flows. Investors are not concerned as to what you paid for your assets. A buyer is focused on the cash that the business can generate and its risks. This is especially true with service and technology companies.

• Too often, the owner is not optimizing their value/opportunities due to lack of preparation. A small investment in preparing for the transaction can more than pay for itself if properly executed.

• Owner’s attachment to the Company. If the Company has paid your salary, the children’s tuition, etc., you place more value on the enterprise and may not appreciate the risks associated with the business from an outsider’s perspective.

• Valuations based on the rare astronomical business successes. Examples include Instagram, Facebook and Apple - these entities are so far outside the realm of th norm that any meaningful comparison is ludicrous.

• Private Equity Firms and the relatively low cost of capital have generated an unprecedented frenzy over competing for the companies with an EBIDTA greater than $5 million.

• The owner is equating the valuation based on wants/needs, not on a fair market value.

Before deciding to sell your business, hire an independent, accredited business valuator to provide you with a reality check as well as means of improving the future price.

The Hidden Dangers of Relying Solely on Business Valuation Multiples

Business valuation multiples—like EV/EBITDA, P/E, and Price/Sales—are among the most used tools in finance. They’re quick, easy to communicate, and widely accepted. But while these metrics can offer a useful snapshot, relying solely on them is not only simplistic—it can be dangerously misleading. In valuation, shortcuts are costly. Multiples can guide you, but if you rely on them alone, you’re flying blind.

They Ignore Company-Specific Risks

Valuation multiples assume a level of comparability that rarely holds true in practice. Each company faces its own unique risk profile, including:

• Customer concentration

• Competitive positioning

• Geographic exposure

• Legal and regulatory environments

• Operational resilience

For instance, two companies might trade at similar multiples, yet one could be exposed to a single volatile market while the other has a diversified global footprint. Multiples alone can’t capture these nuances, which can materially impact long-term value.

No Assessment of Management Quality

One of the most overlooked flaws in using only multiples is their complete disregard for management—arguably one of the most critical value drivers in any business.

Strong leadership can be the difference between a company that scales efficiently and one that burns through capital. Strategic clarity, executional discipline, capital allocation, and culture all start at the top. Yet valuation multiples assign zero quantified value to the team steering the ship.

Whether you’re investing in a startup or acquiring a mature business, failing to assess management is a major blind spot.

They Reflect Market Sentiment, Not Intrinsic Value

Because multiples are typically derived from publicly traded peers, they’re inherently reflective of market sentiment—which can be volatile, biased, or outright irrational.

Valuing a private company based on inflated public comps during a bull run, for example, could result in overpaying by a wide margin. Multiples reflect what the market is currently willing to pay, not what a business is fundamentally worth.

They Assume Peers Are Truly Comparable

Even within the same industry, companies can vary drastically in terms of:

• Scale

• Growth rates

• Profitability

• Vendor relationships

• Capital intensity

• Customer base

Applying an average sector multiple to a business without deeply understanding these differences can lead to mispricing. True comparability requires more than a shared NAICS code.

They Overlook Capital Structure and Cash Flow Nuances

Metrics like EV/EBITDA ignore critical elements such as:

• Capital expenditures

• Changes in working capital

• Tax structures

• Debt levels

Two businesses may have identical EBITDA figures, but vastly different free cash flow profiles. Similarly, a highly leveraged firm may appear attractively priced on an EV basis, while hiding significant balance sheet risk.

They Strip Away Strategic and Narrative Context

Multiples reduce complex businesses to simple math. But valuation is more than arithmetic—it’s strategy, story, and judgment. A company’s future prospects, positioning, vision, and innovation pipeline can’t be expressed in a single number.

Conclusion: Use Multiples, But Don’t Be Blinded by Them

Multiples are useful—fast and standardized—but they are no substitute for real analysis. They ignore management quality, gloss over risk, and fail to capture what makes each business unique. For a credible, defensible valuation, multiples should be just one piece of a broader toolkit that includes:

• Discounted cash flow (DCF) analysis

• Scenario modeling

• Strategic due diligence

• Management and operational assessments

Valuing Intellectual Property

Lakelet Advisory Group’s business valuation focus is challenged entities and complex intellectual property (“IP”) assets. Valuing early stage, technology-based intellectual property assets is challenging, in large part due to the difficulty in incorporating the effects of risk and uncertainty inherent in these assets into their valuation. Technology-based intellectual property assets, usually protected as patents and/or trade secrets, are typically valued using the same three common approaches as are used to value businesses or other assets. These approaches include:

1. Income approach

2. Market approach

3. Cost approach.

However, technology-based IP assets pose many unique challenges to a valuation analyst. A few illustrative examples of such challenges include:

• Income approaches are often difficult to implement for a variety of reasons, including the difficulty in quantifying the portion of a product or service’s cash flows that are attributable to the subject IP asset

• Market approaches are often difficult to implement for many reasons, including the fact that IP assets are, by definition, unique. As such, comparable market transactions are often difficult or impossible to find. In addition, because IP assets are not traded on public markets and the transactions themselves are typically confidential, there are few public sources that reveal deal details that would be sufficiently comparable to be used to implement a market approach, and the data available from sources that do exist is often incomplete

• Cost approaches are often difficult to implement because the cost to create the subject assets is almost always unrelated to the value of the asset (e.g., income generation, cost savings, etc.) that can be gained from use of the asset

In addition to these challenges, perhaps the most difficult issue associated with valuing technology-based IP assets is accounting for the significant risks associated with many of these assets. Accounting for risk is particularly difficult in the very common situation when technology-based IP assets are valued prior to any (or significant) commercialization success; i.e., when the assets are “early stage.”

Lakelet Advisory Group would be most interested in assisting you with your challenging restructuring/bankruptcy or intellectual property valuations.